While many people want to leave a legacy to their loved ones after they are gone, in many cases they also leave behind unpaid debts. What happens to those financial obligations after they pass away?
What happens to debt during the succession process?
Around three out of every four Americans are likely to have debt when they pass away, with around 70 percent having an outstanding credit card balance. While this debt does not generally pass directly to a person’s heirs, it can impact how much those heirs receive after succession.
During the succession process, the executor inventories the estate. This involves creating an inventory of all of their assets as well as their debts. The executor then pays the debts using the assets in the estate before transferring the remaining assets to their loved ones. As a result, debt can decrease the assets in the estate and decrease the amount that will transfer to a person’s heirs.
Are there situations where I might inherit my loved one’s debt?
As the Consumer Finance Protection Bureau notes, the obligation for a loved one’s debts may pass to someone who shared that debt with them. This can occur if they co-signed for a loan or if they co-owned the relevant account, for example. Creditors may also contact a surviving spouse to collect on the debts their loved one left behind.
Debts might also pass to an heir based on the assets they inherit. For example, if a person inherits their loved one’s home, the mortgage for that property would become theirs as well.
Because of the impact that debts can have on a person’s estate, people should carefully consider that debt during the estate planning process and be aware of debt’s impact during succession.