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Part 1: What happens to my debt when I die?

Part 1: What happens to my debt when I die?

What happens when you die owing more than you own? The debt doesn’t just disappear.


As financial planners, our job is not merely to help you reap the benefits of making your money work for you while you’re alive. Beyond that, we want to ensure you have plans in place to financially protect your loved ones after your passing.

There may be nothing fun about estate planning (deciding what should happen to your assets after your death), but it is imperative if you want to leave behind a meaningful and lasting legacy for those who rely on you most. We have seen it time and again where families “battle it out” over money after a parent or other loved one has passed.

In our four-part series on debt after death, we’ll unravel how failure to plan can have devastating consequences and how you can prevent them from happening.

 “By failing to prepare, you are preparing to fail.” – Benjamin Franklin

There is a common misconception that when someone dies, their debt dies with them. On the contrary, debt generally remains, along with the obligation to repay it.

When a person dies, any outstanding debts becomes part of his/her estate. An estate is comprised of everything you own, from financial accounts – including debt – to physical possessions such as your car, jewelry, and home, at the time of your passing.

Your estate may go through a court-supervised process called probate.

If you have any assets that are titled in your name only and do not have a designated beneficiary, those assets will go through probate. Probate is a legal process in which a judge gives legal permission for assets to be passed on but not before all your debts are paid.

Debts must be paid before anything can be distributed to heirs.

Someone is responsible for making sure your debts are paid off. Typically, this “someone” is called the executor of your estate and is named in your will. This individual is responsible for using those assets subject to probate to pay off any outstanding debts before your loved ones will even get a dime.

But what happens when there’s not enough money in those accounts?

The executor must notify the court that there isn’t enough money to pay everyone, after which the estate is declared insolvent – meaning there’s more debt than there is cash and investments to cover it. In this case, a judge determines the order in which remaining debts must be paid in accordance with state laws.

Next Tuesday we’ll discuss which creditors generally take priority. Stay tuned!

The Bottom Line: 

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It’s time to dismiss the idea that debt ceases to exist after death because neither the debt nor the obligation to repay it magically disappear. Your assets, if not protected, will be used to pay off any outstanding debts, reducing the amount of inheritance you leave your heirs.


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