How Debt Affects Your Family When you Die

There are a thousand different circumstances that lead people into debt but these people all have one thing in common. None of them will live forever. A common concern among this group of people is how their debt will affect their loved ones when they are gon.e. The major concern is that their heirs will inherit their financial problems and credit obligations.

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Can someone inherit debt?

The simple answer to this question is no. However, as with most things in life there are exceptions. Let's start with the basics. When someone dies with outstanding debts their assets are first used to pay for probate costs and funeral expenses. (1) The remaining assets are used to pay off creditors. Until the debts have been paid assets will not be transferred to family members. An exception to this rule relates to secured assets such as houses or cars. Secured assets can be transferred to a 3^rd party with debt still attached. (1) For example, if a person was willed a $100,000 which currently had a $50,000 mortgage then the heir would assume the $50,000 of debt along with the house. In some circumstances a portion of the deceased property may need to be sold in order to pay off debt. In this case it is up to the discretion of the appointed executor to determine which items are sold. If the total amount of assets (including proceeds from sold items) do not equal the amount of debt owed than the creditors receive a shorted amount. The debt is not transferred to children or other heirs.

Exceptions

There are a limited number of circumstances that would obligate an individual to assume the responsibility of a deceased person's death. If an individual has co-signed a loan then he assumes full responsibility for repayment. Likewise, if you were shared a joint account or credit card you will are also liable for debts.

Although a person's debts can not be inherited they can still negatively affect your family after you are deceased. Family heirlooms that you wanted to give your children may be sold to pay creditors. Assets that you hoped would support your family could be taken as well. This should be a powerful motivator to get your financial house in order as soon as possible.

(1) http://www.legalzoom.com/law_library/wills/debts.html

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About the author:

Mark Carney is a professional consultant with First American Debt Consolidation and Loans, a debt consolidation service specializing in financial education, credit counseling, and debt reduction management nationwide.