What Happens to Debt When Someone Dies?

If a person dies, his debt usually doesn't die with him. Debts a person owed when he died become part of his estate, the term used to describe the assets and debts left by a deceased person. The person managing the estate is responsible for paying the creditors in the order set by state laws.

Unsecured debt is debt that wasn't backed by any property. For example, credit cards, personal loans and payday loans are all unsecured debt. Since the debtor didn't put up any form of collateral or security, such as a car or house, to receive credit, the debt is not secured by anything. The lender can't take any property back to pay off the debt. In most cases, unsecured debt becomes part of the estate's total debts when someone dies. The creditor cannot go after the heirs of the deceased person because the heirs have no personal legal liability for the debt.

Secured debt is backed by property. Car loans, boat loans and mortgages are all secured debts because the lender can take the property back if the loan isn't paid. While secured debt also becomes part of the estate debt if the debtor dies, leaving the heirs with no personal legal obligation to pay the debt, the lender can take the property back if the debt is not paid by using the repossession or foreclosure procedures set by the state. If the deceased person used a will to leave a beneficiary an asset that has secured debt, such as a home with a mortgage, the beneficiary can refuse the inheritance to avoid assuming the debt.

Debts are paid in the order set by state law. Some creditors have priority above that of private unsecured and secured creditors. Federal debt and state debt, such as income taxes, and child support recipients may have priority over other creditors during estate proceedings. The child support obligation ends with the payer's death, but if he owed arrears at the time of death, the estate is usually responsible for paying the amount owed. The expenses associated with the estate settlement, such as court fees and attorney fees, usually have priority over other creditors. Student loans obtained through the federal government's program may be canceled if the borrower dies. The estate must contact the U.S. Department of Education and provide the department with a clear, legible copy of the death certificate for the borrower.

Both secured and unsecured creditors may file a claim against the debtor's estate. The claim, which identifies the creditor, the money due and the debt type, is filed in the probate court conducting the estate proceedings. The person handling the estate, usually an executor or administrator, must account for debts and assets to the court and use assets to pay the estate debts before giving money to beneficiaries. If the estate doesn't have enough assets to pay all the debts, state laws decide who gets paid, how much and in what order. Distributions to beneficiaries under a will may be reduced to free up money for creditors.