What happens when you die with debts?

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by Chadwick Boyd

This is a question that is coming up more and more in my practice as the cost of living keeps rising and people are having a difficult time making ends meet, especially seniors. Many people are concerned that their beneficiaries, such as their spouse or children, will become responsible for paying their debts after they die. I have met at least three seniors who are continuing to work, or who have even taken second jobs, to try to pay off their debts before they die so their children are not stuck with them.

This is simply not what will happen in most cases. If you die with debts, those debts do not become the responsibility of your beneficiaries. They are the responsibility of your estate. If your estate has insufficient assets to satisfy your debts, then your estate will be considered insolvent and the debt uncollectible (of course your beneficiaries will not receive anything from your estate either).

But, there is an important exception to this. If your beneficiaries have agreed or agree to be responsible for your debts, such as co-signing on a loan, then they will be responsible for those debts after you pass away.

What about the costs of your funeral? Normally, the costs of your funeral will get paid before your creditors get paid, provided that the costs of the funeral are reasonable.

Last, but not least, it is important to note that, in most cases, life insurance proceeds, if there is a beneficiary other than your estate named on the policy, will not become subject to the claims of your creditors. The proceeds of the life insurance will be paid directly to the beneficiaries named on the policy and by-pass your estate, and its debts, entirely.

Of course, everyone’s situation is unique, so it is wise to consult with an estate planning professional to review your situation.

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