Unpaid debts may need to be paid after you die.

No surprise there.

Like man Americans, you have a mortgage and credit care debt.

Perhaps you even took out a loan to start a small business.

Although you are faithfully making payments, you have began to wonder what will happen to unpaid debts when you die.

According to a recent CNBC.com article titled “ “This is how your unpaid debts are handled if you pass away,” the answer is not the same for everyone.

Creditors may make claims on your estate for unpaid debts when you die.

How unpaid debts are handled when you die depends largely on the organization of your estate.

Your estate includes your home, your checking accounts, your car, your IRAs, and other assets.

Many surviving spouses worry they will become destitute when you die to satisfy your debts.

They fear losing their home and their financial security.

Although most individuals are not held responsible for the unpaid debts of a spouse, there are exceptions.

Part of the probate process involves paying debts before the remaining assets are distributed.

Creditors must be given notice so they can make claims against the estate of the decedent.

Different states have varying timelines for how much time is given to creditors to make these claims.

It could be as short as a few months to as long as a few years.

Each state typically has a hierarchy when prioritizing unpaid debts.

Often states require funeral expenses to be paid first.

Next, estate administration costs are paid.

Taxes, hospital bills, and medical expenses are then paid from the estate.

Does this mean any of your assets will be leveraged for payment?

No.

Accounts with beneficiary designations are not included in your estate because these pass directly to heirs.

These typically include qualified retirement accounts and life insurance policies.

If you have a trust, assets held in the trust do not pass through probate and are not considered a part of your estate.

Jointly owned assets will also pass directly to the other owner if properly titled.

What does this mean?

With strategic planning, you could protect many of your assets from being drained by unpaid debts.

If your state has “community property laws,” how debt is handled may become more complicated.

How so?

These states consider both assets and debts to belong to both spouses even if the asset or debt is only in the name of one spouse.

If assets are not enough to cover the debt and this is expressed during probate to the creditor through a letter, the creditor may be advised to forgive the debt.

If you co-sign on a loan, this is not likely to be forgiven.

Certain student loans are discharged if the student dies or if the parent who took out the loan dies, but not always.

Working with an experienced estate planning attorney can help you understand the state laws governing unpaid post-mortem debts, as well as what options you have when creating your estate plan.

Reference: CNBC.com (July 31, 2020) “This is how your unpaid debts are handled if you pass away”