A death in the family can affect all aspects of your life, from day-to-day activities to your personal finances. When someone passes away, the cash and property left behind can pass on to loved ones. But things can get more complicated if the person dies with debt. In general, surviving family members don't have to pay the debts of deceased loved ones, but debt can reduce the amount of any inheritance you receive.
Dying With Debt
When someone dies, the valuables they leave behind become a collection of property known as an estate. If a family member dies with debt, his debts are typically paid out of his estate. For example, if your uncle dies with $500,000 of assets and $300,000 of debt, the estate would pay off the debt and then distribute the remaining cash and property to his heirs. If debt exceeds the value of the estate, the estate pays as much of the debt as it can, but the creditors can't collect the excess debt from the heirs. In this case, the lenders are out of luck and simply lose money on the debt that is leftover.
It is not possible to inherit debt, but you could be financially responsible for a deceased person's debt if you shared a financial account. For example, if you open a joint credit card with a parent, you are both equally responsible for paying it back, even if one of you passes away. Similarly, if you have a co-signed loan, you still have to pay it off if the co-signer passes away.
A secured debt is a loan where some piece of property like a car or home acts as collateral for the loan. If a secured debt isn't paid, the lender can seize the collateral to fulfill the debt. When someone dies with a secured debt like a mortgage, monthly payment must continue to be made to keep the lender from taking the property.
How it Affects Your Inheritance
Debts a family member leaves behind serve to diminish the inheritance received by the heirs. Certain assets, however, can pass on to heirs without becoming a part of the estate. For instance, retirement plans like 401(k)s and individual retirement accounts can pass directly to heirs, so they don't have to be used to pay back the deceased person's debt.
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