Debt is Not inherited, Unless

Debt is Not inherited, Unless...

March 21, 2016

What you Own, has to go Towards what you Owe

A question was asked last week about a loved one’s debt. Does debt get passed down to heirs when you die? The short answer to that is No, it doesn’t. But there is a catch to that. What you own, has to go towards what you owe. Let me explain...

Let’s say you and your spouse jointly own a home that is valued at $100,000. So that means you each own 50% or $50,000 of your $100,000 home. I know you probably don’t think of owning your home that way, but legally, that’s how it is.

Now, if your spouse passed away (God forbid) and they owed $20,000 on a credit card that was in THEIR NAME ONLY. Legally, you don’t have to pay that $20,000. That was their debt and it died with them, UNLESS your spouse owned some assets. And in our example, they do. They own $50,000 of your $100,000 home. 

So there are a few ways you can handle this. 1) you can pay the debt as if it were your own. 2) you can sell your home to get the $20,000 out of your spouse’s $50,000 share. Or 3) you can pay off the debt with either saved money or out of life insurance benefits. In any case, the debt has to be paid out of the deceased’s assets. What you own, has to go towards what you owe. Just an FYI though, life insurance proceeds are NOT typically part of one’s estate, unless it’s beneficiary position is tied to the deceased’s estate somehow. So it is not normally an asset of the deceased. I just used life insurance benefits as a possible way of paying off debt in this example.

Not Enough Assets

So what if there aren’t enough assets to pay off all the debts? Well, just like your budgets, you only have X amount of money to pay on your bills, you only have X amount of money from the deceased’s assets to pay on their debts. You just have to choose who gets paid and who doesn’t. In this case, you just inform the creditors that aren’t going to get paid that your loved one passed and provide them with a death certificate proving their death. That’s it, the debt is gone.

Just Grieve

I hope I made this clear enough for you to understand. The passing of a loved one is a stressful, gut-wrenching event that causes most of us to not think clearly. So I want to give you permission to not deal with any major financial decisions at that time and just grieve for about 6 months to a year until your brain starts working right again.

Toujours Prêt