If someone in your family is in debt, you may worry about what that would mean for other family members if something ever happened to them. The good news is that debts can't be inherited. The bad news is that there are other ways that debt could affect your family. Here's what you need to know.
Joint Debts
If you have joint debts, the debt doesn't disappear if one person passes away. Instead, the other person would still have the debt. This is most common for married couples, but could also apply for other joint debts such as two family members buying a house together. However, the surviving person on the debt may have a right to receive the decedent's share of the joint property or compensation for the extra share of debt rather than just having to take on the rest of the debt.
Co-Signed Debts
Co-signers generally aren't released if the primary signer on the loan passes away. The lender usually expects the co-signer to repay the remaining balance unless the loan specifically stated the debt would be waived if the primary borrower passed away. Unlike joint debts, a co-signer has no automatic property rights to anything in the main borrower's estate to cover the remaining balance of the loan. If you're going to ask someone to co-sign for you, you should take out life insurance or leave money in your will to cover the debt for if you pass away.
Individual Debts
If the decedent had individual debts, no other person is responsible for repaying the debt. However, the creditors can claim the decedent's estate during the probate process. Creditors are first in line before any inheritance. Even if the decedent had a will that gives specific people specific items of property or dollar amounts, the creditors get paid first. The heirs would take their inheritance from whatever is left in the estate after the creditors are paid. For sentimental items, such as a family home, the heirs would often be given a chance to buy the property at fair market value with the creditor receiving cash.
Notifying creditors is an important part of the probate process. This gives them a chance to make their claims and for the family to dispute any claims they don't believe are valid.
To learn more about how to handle someone's debts after they pass away, contact a local probate law office today.
