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Debt and probate

You may not think about your debt beyond making monthly installment payments. If you have considerable debt, you may have resigned yourself to the fact that you will never pay it off in your lifetime. Perhaps you believe that your death will bring an end to what you owe, and the balances will simply dissipate. You may also believe that, despite your debts, your children or other heirs will inherit your assets.

Unfortunately, these things may not be true. Depending on your circumstances and the kind of debt you leave behind, your loved ones may have to deal with it. This may be one of the first tasks that your estate executor must handle during the probate process.

Who pays my debts?

Before your estate executor can distribute any of your belongings to your heirs, he or she must tend to your debt. After the IRS, your creditors get first claim to your assets. In some cases, your responsibility for paying back the debt may fall to someone else, for example:

  • Your spouse: If you and your spouse signed for a loan or are joint owners of a credit card account, the creditor will likely expect your spouse to take responsibility for the balance after you die.
  • Your co-signer: Similar to sharing debt with a spouse, if you co-signed a loan with anyone, that person will bear the burden of paying off the loan.
  • Your children: In New Jersey and many other states, certain creditors have the right to seek payment from the children of the deceased. This is mostly true for medical bills or long-term care expenses.
  • Your estate: If you have no living spouse, your executor may have to sell some of your assets to satisfy any creditors who demand payment after you die.

During probate, it will be your executor's responsibility to prioritize the debts, and some creditors expect that they may not receive payment if the assets run out before the estate meets all its obligations. For example, car loans and mortgages take precedence over credit cards, and credit card companies have no legal recourse to seek payment from your heirs if your accounts were in your name only.

In most cases, federal student loans are discharged after you die. However, if you bequeath your house or car to someone and you still owe a balance, your heir may have to refinance in order to avoid foreclosure or repossession. Since these laws vary from state to state, and your circumstance may have special considerations, you would be wise to seek the advice of an attorney as you plan your estate to minimize the burden you leave for your loved ones.

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