Nothing about the death of a loved one is easy. Not only do you have to deal with your grief and sense of loss, but it also won’t be long before you find yourself trying to straighten out their finances and learning what debts they still owe. Figuring out the finances and making sure all outstanding debts are paid is stressful, time-consuming, and confusing.
The first thing you need to figure out which of your loved one’s debts have to be honored and which became irrelevant when your loved one passed.
Are You Responsible for the Debts?
While very few debts simply disappear when a loved one has passed, it’s unlikely that you’ll have to dip into your own bank account to pay them off. The only time you’ll have to dip into your own money is when you co-signed on a loan with the loved one.
The money from any outstanding debts your loved left behind comes out of their estate. Shortly after your loved one’s passing, public notices are issued. At this point, any creditors you’re loved one owed money to will have to contact you or the lawyer you’re using and alert you to the amount of the debt that’s still owed.
The Estate Enters Probate
Many people mistakenly assume that they’ll collect their inheritance within days of their loved one’s passing. That’s never the case. When you’re loved one passes, everything is put into probate. At this point, the person who has been assigned to act as executor of the will steps in and starts managing the estate. If you’re the executor it’s in your best interest to obtain the help of an experienced probate lawyer.
The first thing that happens is that all of the assets your loved one acquired during their life are collected and valued. In this situation, the only assets that matter are the ones that have monetary value, such as houses, vehicles, investments, jewelry, life insurance policies, and bank accounts. Trinkets and non-valuable belongings can be distributed according to the will. If there’s not a will, the items can simply be divided between family members and friends.
The executor of the will (or the probate lawyer you’ve enlisted) contacts all of the creditors who are still owed money. The creditors have a time frame during which they are allowed to file a claim. If the claim is valid, the debt is paid via actual cash your loved one left or via the liquidation of their assets.
Ideally, there will be enough money to pay off all debts. If there isn’t, high priority debts are the first to be paid.
Examples of high priority debts include:
- Mortgages
- Bank loans
- Student loans
- Funeral expenses
- Medical expenses
- Unpaid taxes
It’s only after these debts are paid in full that credit card debt and personal loans are dealt with.
There are some things that aren’t entered into probate. These are considered “pass outside a will” assets. They include:
- Life insurance policies
- Brokerage accounts
- IRAs
- 401(Ks)
- Payable on death accounts
Once all of the outstanding debts are paid off, any financial assets that remain are pooled together and distributed according to your loved one’s wishes.