The Inner Workings of a Law Firm

How Debts Are Handled After Death

14 November 2019 by Jo Rodriquez

In as much as people plan for the distribution of assets after death, it is also advisable to plan for the settlement of debts under the same circumstances. For you to plan for your debt settlements, you need to understand how debts are handled when a person dies. Below are some of the things that determine debt settlement after death.

Type of Debt

The type of debt you have is a critical factor in determining what happens to it after your demise. Some debts must be paid while others may be forgiven. In most cases, debts attached to a property must be paid, or else the financier might repossess the collateral. For example, mortgage lenders have the authority to collect their debt or repossess the property. Another example is federal student loan debt, which is usually discharged when a person dies.

State Laws

Your state's laws may also determine which debts your estate has to settle and which ones may be discharged. For example, some states give priority to estate beneficiaries, such as dependents or creditors, over credit card companies. In such states, the credit card companies only get their money if there are enough funds to go around for everyone.

Existing Contract

Some debts exist due to contracts between two or more parties. In such cases, the debt is handled as specified in the contract, as long as the contract is legally binding. For example, debts related to a real estate lease will be treated as specified in the contract. The same is true for debts related to business contracts or personal student loans.

Nature of Debtor

The nature of the debtor also determines which debts must be paid. For example, some loved ones may forgive the debts you owe them after your demise, especially if you have dependents that need the money. Some financial institutions, as incentives to their clients, have policies that forgive debts upon death.

Available Assets

Irrespective of all the above factors, debts can only be paid if there are adequate resources to cover them. Usually, state laws determine the order with which debts must be paid after death. In many cases, the creditors will only receive a portion of their dues if your estate is insolvent. Also, there are estate assets that have designated beneficiaries and creditors cannot touch them. Examples include retirement funds, mutual funds, and life insurance policies, among others.

You don't want to make it difficult for your beneficiaries to take charge of your inheritance and settle your debts. Work with an estate planning attorney now to help you plan for such eventualities.

For more information, contact a law firm service.

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