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If you are beginning the process of estate planning, one of the most important questions you may have is, “what happens to debt when you die?” Your debts don’t just go away when you pass — they are paid out of your estate. If there isn’t enough money in your estate to cover the debts you owe, they may not be paid. However, there are some exceptions to this rule, and situations where someone else may be liable to pay the creditor.
How are Debts Paid After You Pass Away?
The personal representative, also referred to as the executor, is the individual responsible for administering a decedent’s estate after their passing. Not only do they distribute the decedent’s assets and property in accordance with the terms of their will (or by intestate law if there is no will), but they are also required to notify creditors that the estate is going through the probate process.
A creditor may be entitled to seek a claim against the estate within a certain time period. In the event a creditor is low on the priority list and there are insufficient funds to pay the debt, they may only be paid some — or even none — of the debt that they are owed. Secured debts, such as a mortgage or a car loan, must be repaid entirely. If the debt is not satisfied, the lender may take action to repossess the asset. Notably, anyone who inherits property with a debt on it, such as real estate, may also inherit any debt that is associated with the property.
What Order are Debts Paid?
In addition to wondering what happens to debts when you die, you might also be concerned with how they will be paid. Under Michigan law, a decedent’s debts must be paid in a specific order. Preference is not permitted to be given to one claim over another in the same class. Typically, the order of priority of repaying debts after someone passes away is as follows:
- Administration costs — These are the expenses that are required to manage the estate. Administration costs can include attorney fees, court costs, and the executor’s fee.
- Funeral expenses and burial costs — Reasonable funeral expenses and burial costs are required to be paid after administration costs have been paid.
- Homestead allowance — The homestead allowance is an amount that is exempt from estate debts that allows for a portion of the decedent’s estate to support surviving family members.
- Allowances for family — A reasonable sum is allowed for the maintenance of the surviving spouse and dependent children during the administration of the estate.
- Exempt property — A certain value of household furniture, vehicles, and other personal effects for the surviving spouse and dependent children is exempt.
- Debts with priority under federal law — Debts that have priority under federal law can include federal taxes, any federal tax liens, and medical assistance payments subject to adjustment or recovery from an estate under the Social Security Act.
- Medical and hospital expenses — Medical expenses related to the decedent’s last illness are paid from the estate, along with compensation to those who attended the decedent.
- Debts and taxes with priority status under state law — Michigan taxes must be paid out of the estate assets.
- All other claims — Other claims include those that do not fall into the higher categories as defined by Michigan statute.
An executor can be held personally liable if they fail to follow proper procedures and distribute assets to beneficiaries prior to paying creditors. They can also incur liability if they do not provide the decedent’s creditors with proper notice.
Are Heirs Responsible for the Decedent’s Debts?
When worrying about what happens to debt when you die, you might be concerned that your family will be forced to take on this economic burden. Importantly, this is not the case. Family members are usually not responsible for paying the debts of a loved one after they pass away.
However, there are several situations where someone else may be responsible for paying a decedent’s debt after their passing. For instance, a co-signer on a loan with outstanding debt or a joint account holder on a credit card may both be held accountable, even if they were not the person who incurred the debt.
Contact an Experienced Estate Planning Attorney
If you are worried about what happens to debt when you die, it’s essential to consult with an experienced trusts and estates attorney. A comprehensive estate plan can address these issues and give you the peace of mind you need that your loved ones will be provided for in the way you had intended. We welcome you to contact Estate Planning & Elder Law Services today to learn more about how we can help you create a strategy that will ensure your wishes are carried out.
