Unsecured debts

Most debts fall under the category of “unsecured debts”, that is, debts where something was not put up as collateral that the creditor can take if the debt is not paid. The largest type of debt that usually falls into this category is credit card debt. Other unsecured debts include funerary costs, medical costs, and utility bills. All unsecured debts must be paid off before the estate is distributed to heirs.

Secured debts

The largest single debt payment most people have is usually a secured debt. Mortgages, home loans, car loans, and the like are all secured debts. These debts can be distributed without being paid off. In the case where this type of event happens, the debt does not disappear; it simply transfers to the heir. Thus, if you leave a $100,000 house to your children, but still owe $25,000 on the mortgage, the house will not be sold. It will be passed on to the children, but they will still owe the remaining $25,000 on the mortgage.

Debts exceeding assets

If a person dies with more debts than assets, the result is similar to what happens when a person declares bankruptcy without sufficient assets to cover the debts. All of the assets in the estate will be liquidated, sold off, and the resulting funds used to pay off the debtors. Any overage in the debts is simply forgiven; the deceased debtor’s heirs will not be held responsible for the dead person’s debts. The exception is if an heir has specifically signed on to pay off the debt, in which case it will be treated as the heir’s. If the debts equal or exceed a deceased person’s assets, no heirs will inherit anything, regardless of what may have been arranged beforehand.

Debts owed to deceased

Death does not eliminate debts owed to a person. If a person was owed a debt in life, that debt is still owed to the estate. The estate, and whoever responsible for handling it, is still entitled to take whatever actions the deceased creditor would have been entitled to. This can include contacting the debtor, turning the debt over to a collection agency, or taking legal action against the debtor. Any debts collected towards a deceased creditor is applied to the creditor’s estate, and then split according to whatever standards set for the estate. The exception to this case is if the decease specifically forgave the debt in his or her will or final documents. This functions similarly to granting someone or something a gift in a will, except that instead of giving them money or assets, you are forgiving a prior debt, in effect turning the prior debt into a gift.

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