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What Happens to Debts after You Pass?

A man holding a Debts sign

When you think about planning your estate, you probably consider the ways that the property you own and other assets in your name will be distributed among your loved ones. If you’re like most people, however, you might not have considered how your debts will be handled after your death. Read on to learn how debts are resolved after the debtor’s passing, and speak with a Kentucky estate planning lawyer with additional questions.

Payment of debts completed before gifts distributed

As a general rule, any debts still in existence when the debtor dies will be paid off from the debtor’s estate. In rarer cases, debts are extinguished when the debtor dies. Federal student loans are one example of debts which are eliminated when the debtor passes away. If the debtor had an outstanding credit card balance, the creditor will file a claim against the debtor’s estate for the amount of the debt. Claims by creditors will be paid before any of the heirs will receive the gifts left to them in the debtor’s will with the exception of a $15,000 exemption for spouses and children. These gifts may be reduced depending on the amount of debt owed by the decedent. However, unsecured debts such as credit card debt or medical bills won’t pass on to any of the debtor’s heirs unless the heirs co-signed the debt or were responsible for incurring a portion of the debt. In other words, a spouse who opened a joint credit card with the deceased person will still be personally responsible for that credit card bill when their spouse dies, but a child would not become responsible to pay that bill if the estate doesn’t have the necessary funds to do so.

Mortgages handled differently from unsecured debt

Mortgages, car loans, and other debts secured by collateral are handled differently than unsecured debt. If the deceased person owed money on their mortgage when they passed away, what will happen to the home will depend on the terms of the loan. In some cases, an heir can assume the mortgage and continue making payments on the home, as did the deceased person. In other cases, the mortgage will have what’s known as an acceleration clause, which will make the mortgage due immediately upon the death of the homeowner. In those cases, or where the heir cannot afford to keep making the mortgage payments, the heir will need to sell the home.

There are many ways to leave gifts to your loved ones as part of an estate plan other than through a will, and creditors are not legally able to collect debts from all types of assets. Certain types of trusts, retirement accounts, and life insurance benefits may allow you to leave gifts to your family that cannot be reached by creditors. An experienced Kentucky estate planning attorney can help you create an estate plan that benefits your loved ones most.

If you need assistance with planning your estate, asset protection, or other elder law issues, contact the dedicated and skilled Louisville estate planning attorneys at the Ruby Law Firm, at 502-895-2626.