Dying with Debt
At some point in our lives we may ask ourselves: “If I die and have debt, who or what will be responsible for paying back those I owe?”
In Nebraska, the only time a family member would be responsible for parents’ debt is if they cosigned a loan or were a joint borrower on the loan. People generally do not inherit another person’s debt. Of course, debt that is secured with collateral such as assets or property must be paid or the collateral will be subject to repossession. Children are not responsible for the balance if secured debt is not totally covered by the value of the collateral. On the other hand, children can keep the collateralized assets if they are willing to assume the debt.
When we die, a new entity emerges, called the estate. An estate represents the deceased’s assets and liabilities. Upon death, a legal process called probate will resolve the debts and distribute remaining assets to the heirs. On the other hand, in Nebraska, probate is not required if the estate is less than $50,000. Without probate, creditors who have no secured interest in their contracts may have to take a loss, since they cannot come after the children for repayment and they have no other legal means to demand repayment.
Under probate, creditors must be paid from assets within the estate, such as money or property. Creditor have a limited period after probate is opened in which they may make a claim against an estate for payment.
There is a legal pecking order as to who is allowed first claim to retrieve money from the estate. The higher priority goes to funeral expenses, administrative expenses, and federal taxes. The estate may then pay off expenses from the last illness and state taxes. A surviving spouse and dependant children are entitled to a homestead allowance of $20,000 and exempt property allowance of $12,500, which have priority over creditor claims. At the bottom of the barrel are unsecured creditors, like credit card companies.
Generally, all debts must first be paid by the estate before any remaining assets are distributed to the heirs. An outstanding credit card balance, for example, must be paid before any money or gifts can be distributed to an heir. If there are not enough assets to pay the debts, then all assets and property will be sold to pay down as much of the debt as possible and the heirs will inherit nothing.
In the case of secured debts such as home mortgage or auto loans, this property may be distributed to heirs subject to its debt. For example, if a car is worth $15,000 and the loan on the car is $7,500, the person inheriting the car assumes the debt. At death, in most states, it is a simple matter to transfer the title to someone else and it will become that person’s obligation to pay off the loan.
In short, when someone passes away, the estate is responsible for paying off any balances owed by the deceased, not the family. If the estate goes through probate, the personal representative or executor will look at the debts and assets and determine in what order the bills should be paid. Nebraska has exemptions and allowances for surviving family members that provide some priority. The remaining assets will be distributed to the heirs according to a will or state distribution laws if no will exists.
Thanks to the National Care Planning Council