Can a creditor take your loved one’s home?

Things to keep in mind about creditor claims

• If your loved one’s estate goes through probate, creditors have a chance to claim outstanding payments.

• Surviving family members are generally legally entitled to take over a mortgage if they’ve inherited property.

• While most of the time creditors cannot take your home itself, they can make claims in an amount that might require you to sell your loved one’s house.

• Mortgage lenders can repossess property if payments can’t be made.

• In community property states, a spouse may have to use their house to pay debts incurred during the marriage.

In most cases, after a loved one has died, you won’t need to worry about their creditors lining up to seize assets or property in order to pay debts. Typically, the executor of the estate can pay outstanding taxes, funeral and medical expenses, and other small debts out of the estate, regardless of whether it goes through the full probate process.

Understanding when and how a creditor can claim large properties like the house is complicated, and often depends on the state laws around how creditors must legally operate. 

Because the house is often part of the estate (and will be included if you’re going through probate), it can be used to pay off debts. This, however, can be a tough pill to swallow for family members, particularly if it’s where you grew up and made many childhood memories. Letting the house go can add to your feelings of grief, so it’s important to know what you’re up against.

If the estate goes through probate

When an estate enters probate, the court names an executor to be in charge of gathering assets and paying off debts. The exact laws differ by state, but real estate is almost always included in the overall value of the estate. After probate begins, creditors have a chance to claim outstanding debts, usually within a specified period of a few months. 

The tricky part of this process is how any outstanding debts that need to get paid will be settled. While the creditors can’t claim the house itself, they can make claims in an amount that might require you to sell the house.

For example, your loved one had $100,000 worth of debt and they owned a home worth $200,000 but no other significant assets, you might need to sell the house to pay off the $100,000 claim on the estate. 

If this happens, you’ll have to do a lot of talking through the options with the other beneficiaries to come to an agreement on how to pay the debt, and whether you must let go of anything you’ve collectively inherited. This can be extremely difficult and emotionally fraught, and it’s best if everyone hears each other’s opinions patiently and discusses them calmly.

In the case of insolvent estates

An insolvent estate, or an estate whose debts exceed the value of its assets, is a different circumstance. If your loved one was the sole owner of the home in question and still had a mortgage out on it, that mortgage is considered a secured debt. This means that the lender (usually a bank) can repossess the property if payments can’t be made, and they can do so regardless of any other debts that the estate owes. 

However, insolvency does not necessarily mean you must give up the house. If you are set to inherit the house or a part of it, you can choose to make the mortgage payments on time with your own funds. As long as the house does not need to be sold to pay off other debts, the property can then pass to the beneficiaries, who will then be given an opportunity to sign a new mortgage or, if they are closely related to the person who passed away, to refinance or take over the old mortgage.

Similarly, if there is a lien on the house, the creditor can seize the property for the repayment of that debt if the family does not or cannot sell the house to settle the debt. A beneficiary can, however, choose to pay off a lien from their own funds in order to avoid the property being seized.

Other circumstances when creditors can make claims

There are certain situations in which creditors can make claims on property outside of probate, such as the debts of a spouse in a community property state. In nine states (Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin), a spouse can be held legally responsible for any debts taken out during the marriage, regardless of whether they knew or approved of them. 

This could mean that, if ownership of the house is transferred to the spouse, creditors can still hold them accountable for thousands of dollars worth of debt they didn’t know existed. This can result in them needing to find a way to pay them off, including selling the house

This, of course, can be extremely hard for anyone involved, so it’s important to be there for one another and find ways to provide emotional support. 

If you’re worried that there’s a danger of losing the home to creditors, you can seek advice from an estate lawyer. They’ll be intimately familiar with the laws in your state and will have a good handle on your options for keeping the property. At the very least, you’ll have peace of mind knowing you did everything you could to keep your loved one’s home in the family.

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.