Dying with outstanding debt

It is becoming more common not only to continuously acquire debt over a lifetime, but to be in the position where you know your debt will outlive you. While many have envisioned leaving significant assets for loved ones, more people now have debts they may not be able to pay off completely.

As you develop your estate plan, it is important to have a realistic perspective of what assets you will be able to pass on to your loved ones, and which ones are not yet yours to give away.

The following outlines some of what you should know about creating an estate plan when some of your assets are not fully paid off.

Your debt (typically) does not become an heir’s debt

In most cases, the only time your heirs would take on the responsibility of your debt is if they co-signed on a loan with you. In that case, the individual should understand that if you pass away before the debt is paid, they will be responsible for paying the balance of the debt.

Typically, it is part of the probate process for the assets of an estate to be used first to pay the costs of administration; then to pay taxes and other valid debts according to the class of a creditor’s claim; and finally, the remainder to heirs. When there are not enough assets to pay off the debts of an estate, a co-debtor is often out of luck. However, in the case of a loan for a specific asset such as a house or car, the creditor can repossess the asset or it can be voluntarily returned by the debtor to reduce the amount of the outstanding claim.

It should start with an honest conversation

During the estate planning process, you should talk to your loved ones about your debts and assets and what plans you have for them after you pass away. You may be able to come up with strategies for assets that are at risk for repossession.

Even if your loved ones are not able to help you pay off your debts, it is important that they know how the probate process will proceed before you pass away.