Who pays the deceased’s debts?
An individual debt, or personal debt, is an obligation that just one person agrees to repay. This type of debt is also described as debt that is “entered” or “taken” in just one name without another person’s participation. For instance, when you apply for a credit card by completing the application with just your signature, you are personally agreeing to repay any debt that is properly incurred with that credit card.
While living, the sole borrower is the only person required to repay an individual debt; the lender does not have the ability to require someone else to make payments towards that debt.
Just as when a borrower is living, another person cannot be held accountable for the borrower’s personal debts after his or her death. This also remains true even though a person may be related to the deceased debtor, whether by blood or marriage.
For instance, Cliff dies with a credit card that has a $5,000 balance. If this card was opened and held solely in Cliff’s name and used solely for his benefit, the credit card company cannot require his wife, Claire, to pay off the balance with her individually owned assets.
However, it is important to note that all voluntarily incurred debts, such as credit card charges, are contractual and controlled by the terms established by the company. If another person is added to the account as an authorized user, depending upon the company specific terms, he or she may be agreeing to repay all of the debt when using the card.
Repayment By Estate
The fact that Cliff’s family isn’t obligated to pay his debts with their own assets doesn’t mean that the debts are simply forgiven at his death. Cliff’s estate is obligated to pay the credit card balance or as much of it that can be paid before the estate is entirely depleted of assets.
Each state has laws that establish a legal order for the payment of estate obligations, which includes disbursement to beneficiaries or heirs.
This order typically involves payment of burial and funeral costs, expenses of the final illness (hospitalization, medication, etc.), probate fees, and death taxes. These items are paid prior to the payment of any regular, unsecured debts.
Once these priority obligations are satisfied, the estate generally begins paying the unsecured debts. Finally, after all debts are paid the assets that remain in the estate, if any, are available for distribution to the beneficiaries or heirs.
Sufficient Assets
Suppose that Cliff has a $25,000 estate and the costs of his burial, final medical expenses, and probate fees are $7,500, $8,000 and $3,000. Once these items are paid, Cliff’s estate has $6,500 remaining.
Following the statutory order of priority, the $6,500 in Cliff’s estate will be applied to any outstanding, unsecured debts. With $6,500 remaining, Cliff’s estate can pay the full amount of his $5,000 credit card debt.
If this $5,000 credit card is Cliff’s only remaining debt, once it is paid there will be $1,500 left to distribute among his heirs.
Insolvent Estate
Now suppose that Cliff has the same expenses, but his estate is valued at $20,000 (which is $5,000 less than in the example above). After paying the same costs of burial, medical expenses, and probate fees Cliff’s estate will have just $1,500 remaining.
Again following the statutory order, the $5,000 credit card debt must be paid next. Although Cliff owes $5,000 in credit card debt his estate only has $1,500 to pay these costs. In this instance, Cliff’s estate is insolvent because its obligations exceed its assets. The estate will pay the entire $1,500 towards the $5,000 credit card debt and the remaining $3,500 of credit card debt will simply remain unpaid.
The credit card company cannot pursue the deceased’s heirs for the payment of the remaining balance of unpaid debt, even though the estate does not have enough money to pay the debt in full. However, when an estate doesn’t have sufficient assets to satisfy all of its debts, it also won’t have any assets to distribute to the deceased’s heirs.