Understanding the Law: What Happens to Debts When You Die?

What happens to debts when you die?Everyone who creates an estate plan is considering what assets that they want to pass on to their heirs when they die. However, many do not consider what happens to your debts when you pass away. Whether or not your loved ones will be responsible for your debts depends on your estate and the types of debts that you leave behind.

Notifying Creditors

If you leave behind a will or living trust that names an executor or trustee, that person may notify creditors of your passing. This person also usually has the power and responsibility to pay out any outstanding debts to creditors before distributing the remainder of your estate to your heirs. If you just leave behind a will, then notice may be given to creditors about your passing. However, a trust does not require that notice be made to creditors, but giving notice does shorten the time period that a creditor can come forward with a claim against the trust.

If you do not leave behind an estate plan, after your death the court will step in to handle your estate. The probate court appoints an administrator to the estate that has the responsibility to address any and all of your creditors. Like an executor or trustee, an administrator also has the power to pay off the claims of creditors before distributing the estate. Learn more about the responsibilities of an executor or administrator.

After notice has been made public to all potential creditors, any unknown creditors have a short time period in which to make their claims against the estate. If no such notice is given, the creditors have 7 months from the date the executor or administrator is appointed. After this time period passes, any other creditor claims are invalid, and the representative of the estate does not have to pay off those debts.

Debts Carried by Two or More People

If a debt is carried by two or more people, such as with a married couple’s mortgage, the debt becomes the full responsibility of the survivor(s) upon your death. Where the debt has been guaranteed by a co-signer, the co-signer assumes the full responsibility of the debt. Whether the spouse has to pay off any remaining debt is dependent on a number of factors. In some cases, there is enough in the estate to pay off creditors, other times there is not enough and certain creditors do not get paid, and in some cases the creditors agree to receive a reduced amount on the debt.

How Debts are Paid

Debts are usually paid first out of liquid assets, such as a bank account or other cash reserves. If this is not an option, assets like personal property or real estate can be liquidated, and the proceeds can be used to settle debts. However, creditors are not allowed to go after some assets within an estate, such as life insurance benefits or 401(k) retirement plans. In order to shield those assets from creditors, it is important that you name an individual(s) as beneficiary. If the asset is payable to your estate, it may be subject to creditors’ claims.

Student loan debt may or may not be dischargeable at death. If the debt is a federal student loan, then it is discharged when the primary borrower dies, even if there is a co-signer. However, private student loans may not be forgiven when the primary borrower dies, and the co-signer could be held liable for the debts.

For help understanding these and similar details in New York, please contact a New York probate attorney today.

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