If you have significant debts that you cannot pay off, then you need to account for creditors in your estate plan. The idea that your debts will disappear when you die is, in most cases, simply incorrect. Your debts and your creditors stick around, often reducing inheritances if you do not plan ahead.
Debts Survive Your Death
Most debts survive your death and could impact the value of your estate. For example, the following types of debt usually continue even if you die:
- Credit card debt
- Mortgage indebtedness
- Car loans
- Student loans
In rare cases, loan documents may state that debt is extinguished if the borrower passes away before the loan is repaid. It is extremely unlikely that your debt is of this type.
Further, if you have a co-signer on your loan (as is often the case with student loans), the co-signer will continue to be liable for the loan amount if you die. This means that your parent or spouse could end up paying your loan for years.
How Do Creditors Go After Your Estate for Payment?
When creditors learn that a borrower has died, they have one of two options: (1) write off the debt and forget about it, or (2) seek repayment of the debt from the borrower’s estate. Creditors may learn of debts in a few different ways, such as by hearing from relatives about unpaid bills or by receiving a notice from the probate court.
The executor of an estate that is in probate must give notice of the probate proceeding to all known creditors. Then creditors can file claims against the value of the estate. After the executor gathers and inventories all the estate assets, creditors get paid back from those assets. The heirs receive the assets that remain after all debts are paid. If the deceased person’s debts exceed the value of the assets, then each creditor receives payment of only a portion of the debt. The heirs receive nothing.
In today’s world, most people have some sort of indebtedness at any given time. You may worry about providing for your heirs with the risk that creditors will make claims against your estate. Fortunately, savvy estate planning lawyers can suggest several options to you that will protect assets from creditors. Some types of trusts, for example, provide creditor protection.
Planning your estate and worried about debt? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.