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Part 2: I owe more than I own, so who gets paid and who doesn’t?

For many, debt exceeds the amount of money they have in the bank, but that won’t stop creditors from lining up for their share.

Last week we established that debt doesn’t just disappear into thin air when someone dies. Creditors still expect to receive payment from the deceased’s estate, but the hard truth is that many people leave behind more debt than assets to cover those debts.

So, in that case, who gets paid and who doesn’t?

“State laws determine the order of priority in which debts must be paid and it may vary state to state,” says Jessi Patton, an estate attorney who now helps other attorneys build their dream law practice at Juris Diction. Once all estate assets have been exhausted, any remaining creditors are generally out of luck.

 Debts that typically take priority include tax obligations to the state and federal government, administrative costs of settling your estate, and funeral expenses. The remaining debts fall into one of two categories: secured and unsecured.

Secured Debt

“Secured debt is secured by an asset, such as a house or car,” says Sarah Siedentopf, owner of Siedentopf Law specializing in estate and probate law. “In these cases, the lien holder can reclaim the property unless the estate pays off the debt or the person who inherits the asset continues paying it off.”

Unsecured Debt

Unsecured debt does not have any property serving as collateral. If these bills go unpaid, there is nothing that creditors can directly repossess without legal permission from a court. Common types of unsecured debts include credit cards, student and personal loans, utility bills, and medical debts.

Negotiation with Creditors

“In some cases, the executor may be able to negotiate with creditors in an effort to lower the amount due,” says Siedentopf. “Creditors will likely take a lower sum rather than risk getting nothing.”

How would my family be affected by all of this?

“Creditor claims take priority over heirs in probate,” says Patton. “An entire estate could be wiped out before loved ones are able to inherit anything.”

And if a smaller inheritance isn’t reason enough to put a plan on paper, next week we’ll look at the circumstances under which your debt can become someone else’s burden.


The order in which debts must be repaid may vary state to state, but here’s something that applies across the board: All creditors can submit claims against your estate during the probate process and all debts must be paid before remaining assets can be distributed to your heirs.

If you don’t plan ahead, your assets could fall into the ‘wrong’ hands.

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I'm Helen

Having worked in finance for over a decade, I know what matters most to clients. Here, I share with you what you really need to do to stay on top of your money and retire rich.
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