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Katya Sverdlov Blog

Tuesday, March 28, 2017

Are Heirs Responsible for Decedent’s Debts?

According to the most recent data from Credit.com, 73% of consumers had outstanding debt when they were reported as dead, with the average total balance of $62K. Debts included home loans, credit cards, auto loans, personal loans and student loans.

An estate is responsible to pay the deceased person’s debts. If there is sufficient money, the creditors get paid first, and the beneficiaries receive whatever remains. However, if there are insufficient assets to satisfy all debts, then the creditors receive all of the estate’s assets, and the heirs receive nothing. There are some exceptions for retirement plans and life insurance policies, since they have additional protections.

But heirs are usually NOT personally responsible for any debts owed by an estate.

Of course, sometimes there are complications. If the debt is a mortgage, the mortgaging bank can collect, since the mortgage allows  a lien to be placed against the house at the mortgagor’s death. If there are heirs living in the house they may be able to take over the mortgage (depending on the state and the type of mortgage). However, if the heirs do not have an ability to pay the mortgage or have bad credit, then the house has to be sold and the bank’s mortgage satisfied first; any remaining proceeds get paid to the heirs. If the net proceeds of the sale are not sufficient to satisfy the mortgage, the heirs are NOT responsible for any shortfall.

The one additional complication is when the account had co-signers or co-applicants. In this case, in the event the assets of the estate are not sufficient to pay off the debt, the surviving debtor becomes the sole responsible party.  So make sure to be cautious when co-signing on any debts.

Disclaimer: This article only offers general information.  Each situation is unique. It is always helpful to talk to a specialized attorney, to figure out your various options and ramifications of actions.  As every case has subtle differences, please do not use this article for legal advice. Only a signed engagement letter will create an attorney-client relationship.


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