What is considered debt?

Figuring out what the estate owes

• When someone passes away, they pass on almost all of their debts to their estate.

• Secured debt, unsecured debt, revolving debt, taxes, and several others all must be discharged before any assets can be distributed.

• Secured debts are most often passed on to the new owner of the asset. The rest will be paid out of the estate’s assets.

• Federal student loans generally are forgiven when the borrower dies. Other student loans may be forgiven or may be due.

When a person passes away, there’s a decent chance that they will leave behind some debts. From credit card bills to mortgages to other financial obligations that were not settled during their lifetime. Unfortunately, your loved one’s death doesn’t mean their debts go away. The debts still exist and are transferred to their estate or, in rarer cases, to one of their relatives.

Because these debts are still owed, they can invite unwanted calls and harassment by creditors, which is the last thing you want during this difficult time. In general, creditors can be ignored until probate begins, and then will only have to be dealt with by the person’s executor. 

In the meantime, it can be important to be clear on what is considered a debt for the purposes of the estate and what is not. Before any inheritance can be distributed, the estate must pay all outstanding debts. While this may not be the most welcome news for beneficiaries, it is important to make sure that no creditor has grounds for a complaint or lawsuit down the line.

If the estate’s assets are not sufficient to cover all of its debts, it will be declared insolvent, and the courts and state law will determine which creditors are paid and which may not be.

What is considered debt?

The following are debts that an estate is responsible for:

Secured debt

A secured debt is a debt in which the borrower puts up some form of collateral for the financing of the thing they want to purchase. Examples of secured debts are mortgages and car loans. If the borrower fails to make payments, the lender can seize the property. 

Unsecured debt

An unsecured debt is a debt in which the borrower doesn’t need to put up collateral to obtain the funds. To obtain these types of loans, you usually need to show you have good credit and a history of paying loans and creditors on time.  Examples of unsecured debts are student loans, personal loans, credit cards, promissory notes, and leases. If the borrower does not pay one of these debts, it can go into collections. If it’s not resolved in collections, then the creditor can take them to court.

Revolving debt

Revolving debt refers to debt that’s replenished up to an agreed-upon amount. Once the borrower reaches that set limit, they must pay it down before they have access to the funds again. Examples of revolving debt are credit cards, personal lines of credit, and home equity lines of credit (HELOC). With a HELOC you borrow against your home’s equity, with your home as collateral.

Taxes

Unpaid taxes are debts and are owed by your loved one’s estate, whether the taxes were incurred while they were alive or after their passing. For example, federal and state income taxes (including any back taxes), estate taxes, and property taxes. 

Other debts

These include child support, which the surviving parent can make a claim against the estate for; debt for goods or services that were provided but not yet paid for; debt arising from a legal judgment against the person; or business debts if the company was a sole proprietorship or general partnership.

All costs incurred in the handling of and probating the estate, as well as funeral and burial costs, are also considered the estate’s debts, whether they were paid out of pocket by the executor or another member of the family or are still owed at the time the estate is being settled.

What is not considered the estate’s debt? 

When it comes to what is not considered a debt for the estate, things can get tricky. For example, even though the estate technically owes a secured debt like a mortgage, that is only because the estate is temporarily in control of the property that was borrowed against. The executor may need to pay mortgage payments in the meantime in order to avoid foreclosure, but as soon as the property is passed to a beneficiary, that debt passes to its new owner.

If your loved one’s business was an LLC and they didn’t assume any personal liability for the business, then its debts are not debts for the estate.

Federal student loans will either be discharged or forgiven when the borrower passes away, so they’re no longer debts. As for private student loans, whether they’re a debt for the estate to pay off will be based upon the terms of the loan. They may be forgiven upon death, but if the terms state otherwise, they may need to be paid by the estate

Although some states have inheritance taxes, these taxes are levied on the beneficiary receiving the inheritance, and therefore they do not apply to the estate itself.

Finally, there may be people coming out of the woodwork to say that your loved one owed them money. Unless they have a valid and legal claim that they can prove in court, these are not verifiable debts and do not have to be paid.

It’s important to remember that even for legitimate debts, it is solely up to the executor to pay them back, as part of an organized process. Nevertheless, creditors may try to contact members of the family and even threaten them. This is illegal, but that does not stop them from trying to intimidate family members into paying. No matter what a creditor says, politely tell them not to call you again, or if you are the executor, tell them to submit their claims formally as part of probate. 

During probate, all of the estate’s assets will be evaluated and then used to pay back all debts. It can take some time to figure out what needs to be paid and when, but organizing all of the estate’s debts will make the process go smoothly.

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.