Prioritizing debts for insolvent estates

Understanding estate debts

A secured debt is money your loved one borrowed from a lender, which has the legal right to take property if not paid back. E.g., a mortgage or car loan.
If your loved one’s estate has more debts than assets, the estate is considered insolvent, and debts will be paid off in a particular order.
Secured debts will get paid first, as they are connected to the assets themselves. Unsecured debts, like credit cards or personal loans, are generally paid last.
As executor, it is your legal obligation to put off payment of unsecured debts until funeral costs, estate expenses, taxes, and medical expenses are paid off.
Non-probate assets, such as living trusts or retirement accounts, are generally not obligated to be used to pay off your loved one’s debts.

When you’re the executor of an estate, there’s a lot to deal with, both from an emotional standpoint and in terms of your legal obligations. You’re going to have to juggle paperwork, planning, and trying to take care of your and your family’s emotional well-being, all at once. Calls from creditors are probably the last thing you want to think about during this difficult time, but paying the debts of the estate is part of the process.

Most estates do not involve a large, extravagant inheritance. In fact, it’s much more common to encounter a small living trust and a few debts.

An insolvent estate—an estate that has more debts than assets—has to be dealt with in a specific manner, and the debts need to be prioritized based on state laws. This can feel like an overwhelming or unfair task to handle while you’re also dealing with grief. However, with an understanding of the basics, you can feel more confident taking on your role as executor.

Who’s responsible for debts

Debts are commonly held in one of four ways:

Sole responsibility: This means that the person who took out a loan is the only person required to pay it back. After they’ve passed, the executor of the estate will need to use that person’s assets to pay off any outstanding balances and taxes.
Community property: In Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, property and debts are considered community property if they were taken on during a marriage, meaning both spouses own them equally.
Co-signed or jointly-held accounts: If spouses, partners, or beneficiaries took out a loan with or jointly owned an account with your loved one, they will be held responsible for the debt if the estate doesn't pay it.
Inherited debt: Beneficiaries who assume the debt to keep a particular asset, such as a house or a car, take on responsibility for payments.

As the executor of the estate, you will gather a list of all the assets and debts and decide whether there is a need to enter the full probate process.

Understanding the different kinds of debt

There are two main types of debt: secured and unsecured. A secured debt is a loan that has collateral associated with it. For the purposes of an executor, this typically means mortgages and car loans. An unsecured debt is one that does not have collateral, like student loans or credit card debt.

How a debt gets paid off by an estate is dependent on the type of debt it is. A secured debt will always be paid, either with the estate’s assets or through the creditor repossessing the property. Unsecured debts are paid in priority order, and once all of the estate's assets are used up, any remaining debts will generally have to be written off by the creditors.

Most non-probate assets (irrevocable living trusts, retirement accounts, etc.) are protected even from secured debts, because they belong to the beneficiary, not the estate. A notable exception is a revocable trust, which is not a probate asset but can be claimed by creditors if there is not enough money in the estate to pay all of its debts.

How to prioritize debts

Which debts are paid out from the estate first, and which are lower in the hierarchy and so may not be paid if the estate cannot cover them, depends on the laws of the state where your loved one had their primary residence. For example, Washington State law treats an insolvent estate like a bankruptcy during probate, but in Georgia the executor needs to file for a petition to discharge. You’ll want to research the laws where you’re filing the will to understand the specifics for your state. It it is also a good idea to contact a lawyer practicing in that state, particularly if anything becomes confusing or unclear.

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It may not be comfortable to put off creditors of unsecured debts when they come asking for payment, but you absolutely should.

Though the order varies by state, after secured debts are taken into account, the estate will typically then have to cover reasonable funeral costs, plus lawyers’ fees and other costs of handling the estate. Next, you’ll need to pay off taxes, followed by some types of medical debt. And finally unsecured debts like credit cards will be paid off. If there is any ambiguity about which debts need to be paid off before which others, the probate court will tell you which ones have priority.

You’ll want to be cautious in your approach and stick to this order closely. An executor can be held liable for unpaid debts, but only if they mishandle the distribution of assets. This might happen, for instance, if you pay off credit cards first and then discover that the estate owes federal taxes a few months down the line.

It may not be comfortable to put off creditors of unsecured debts when they come asking for payment, but you absolutely should—in fact, it is your legal obligation to do so—until taxes, medical expenses, and other priority debts are crossed off your list.

Getting help

One important note: You do not have to take on the role of executor of an estate. The will nominates someone as executor, but it is only that: a nomination. In the event that you foresee an unmanageable list of creditors to contact and no assets you care to help distribute, you can turn the role down.

In that case, a secondary executor can step forward to take on the role. If nobody volunteers, the court and an appointed estate law professional will handle the probate process and let creditors know the amount of repayment they can expect from the assets available.

It can be difficult, of course, to take on the burden of paying off someone else’s debt. Remember that you are not responsible for it outside of what the estate covers. Never pay creditors out of your own pocket. If you’re overwhelmed or feel like you need backup, you can also always seek the advice of an estate lawyer, who will walk you through the specifics as they relate to your situation.

You may be eligible for free bereavement support. Empathy can help with everything from funeral planning to estate administration, with step-by-step guidance and real-time expert support. Many people get free premium access to Empathy as a benefit with their life insurance claim. We partner with New York Life, Guardian Life Insurance Company, Bestow, Lemonade, and other leading carriers. When you make your life insurance claim, talk to your representative about whether Empathy is a benefit they offer.