Sense & Centsibility Blog

Deceased Relatives and Debts: Who is Responsible?

After a loved one passes away, the last thing you as a grieving family member wants to deal with are debt collectors asking you to pay your loved one's debts. 

So what happens with those debts after the death of a loved one? According to the Federal Trade Commission (FTC), the nation's consumer protection agency, family members typically are not obligated to pay the debts of a deceased relative from their own assets.

Who actually is responsible for the debts then?Concerned couple

The estate of the deceased person actually owes the debt. If there's not enough money in the estate, the debt typically goes unpaid. According to the FTC there are exceptions to this rule; a surviving family member may be responsible for the debt if s/he:

  • co-signed the debt obligation;
  • lives in a community property state, such as California;
  • is the deceased person's spouse and state law requires him/her to pay a type of debt, like health care expenses; or
  • was legally responsible for resolving the estate and didn't comply with certain state probate laws.

The rest of the debt obligations fall to the deceased person’s estate (if there is one), and that is where the situation can get a little muddy, especially for relatives who think they are in line for an inheritance. There can only be an inheritance if there are enough assets in the estate to pay off the deceased person’s debts.

If you are not sure whether or not you're legally obligated to pay a deceased person's debts from your own assets, it's best to talk to a lawyer.

The FTC also explains that the executor is the person named in a will who is responsible for settling a deceased person's affairs. Without a will in place, the court may instead appoint an administrator, personal representative, or universal successor, and give that person the authority to settle her/his loved one's affairs. In some states, others (or other people) may have that authority, even if they have not been formally appointed by the court.

If you are the executor, it’s your responsibility to figure out how to pay creditors by drawing on the money and holdings in the estate when the owner died.

It is NOT your responsibility to use your own money to pay off those debts (unless you are included within the 4 exceptions listed above).

So what happens to assets?

Not every asset someone owns is up-for-grabs upon death. The law divides the deceased person's assets into exempt and non-exempt categories, with the primary distinction being that exempt assets can’t be liquidated to cover debts. 

The list of exempt assets varies by state, but two major assets are exempt everywhere: retirement savings and life insurance policies. Those two particular assets can be distributed to beneficiaries regardless of debts owed by the deceased.

Assets that are non-exempt, meaning available to be liquidated and used to pay off debts, includes a houses, cars, boats, checking/savings accounts, artwork, stamp or coin collections - basically anything that has enough value to be sold.

Insolvent estates are unfortunately becoming a common feature.  An insolvent estate is where the assets that remain aren't sufficient to pay funeral expenses and cover the deceased’s debts and liabilities. As a result, there will be nothing for the beneficiaries of the estate to inherit.

Author Katie Eastman is a Certified Financial Counselor with LSS Financial Counseling.

**The above is not intended as legal advice and laws vary by state. If you're looking for legal advice, speak with an attorney.