In most instances when someone has died, their debt does not get transferred to their surviving family members. If when someone is alive they are unable to pay their mortgage, the foreclosure process is there to let you walk away. Even in situations where you owe more money than your house is worth, the bank will take your house, forgive any leftover debt, and all you are left with is a terrible credit score. However, how does this work once you die? Do creditors and banks to which you still owe money transfer the debt to your family or are you instantly forgiven?


The simple answer is that your debt only belongs to you and it is not transferred to your family members when you are no longer living. The more complex answer is that each state has their own laws regarding this issue and working with an estate planning expert will help you determine what happens to your specific debts after you die. However, in most instances, the only time a family member would be held responsible for your debts would be if their names are on any loans with yours as a co-signer. When someone co-signs a loan, both people are then responsible for the full loan. If someone is not able to pay, the remaining party is responsible for the debt on their own.


Paying from your Estate

Once you pass away, the first step will be to have any debts that you owe paid from the value of your estate. If your estate does not have the value that equates to your debts, the debts will be paid at equal percentages until there is no more money left in the estate. The remaining debt will then be forgiven. This may sound like an easy and great plan, however, all of your belongings are seen as dollar amounts in the eyes of the banks and any of your family heirlooms could be lost to pay for your debt.


The Probate Process

Due to state laws defining the probate process, they typically vary greatly depending on the state. However, there are a few commonalities across the states. The commonalities discuss how your estate is paid out. As mentioned before, family heirlooms are simply seen as a monetary value to the bank. If the money in your bank accounts and any other assets are not able to fully pay for your debt, could a family heirloom be lost to the bank? Unfortunately, debt collectors are able to take family heirloom as they do come with a money value, however, that does not mean that the debts are the first to be paid. The probate process requires the estate to be settled in a responsible order.


The first cost that will be paid out is any cost associated with the funeral. Funerals are very expensive and in addition to those expenses, there are estate planning lawyer and administrative fees to settle an estate. In the probate process, these are paid out first. If there is money left over, the second step is for family allowances to be paid out. These are paid out according to state laws. The third step is to pay out all debt. Once all of the debt has been paid out, they will then start dividing the estate to the family depending on the will. If the estate is not able to cover the costs of the debt, anything that should be handed down to a family member must be sold to pay off the debt.