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What you should know when a loved one dies in debt

When most people think of estate planning, they picture the transfer of wealth and assets. Parents often leave money and property to their children and grandchildren, for instance. In such cases, being the executor of a loved one's estate may be a welcome and manageable responsibility.

Unfortunately, however, decedents sometimes leave behind significant debt that their families weren't aware of. And while heirs are not usually on the hook for paying these debts, the estate itself usually is. Moreover, creditors sometimes try aggressive collection tactics to dishonestly recover money from the family of those who died in debt. Needless to say, it is important for executors and loved ones to understand their rights and obligations regarding debt.

Generally speaking, a decedent's debt will not become the responsibility of any family members. However, creditors can still seek to collect debt from the estate itself. And because debts are paid before inheritances, this would reduce the inheritance that family members are entitled to receive.

It's also important to note that certain expenses are prioritized when it comes time for the estate to be settled. Funeral expenses, taxes and secured debts are the first priorities. Any money (and sellable property) that remain may end up going to pay credit cards and other unsecured debts. If the estate's assets do not cover all outstanding debt, creditors cannot demand any additional funds from family members or loved ones.

Of course, there are certain exceptions related to co-signed loans and jointly held loans. There may also be some exceptions to certain debts acquired on behalf of a person's family, because California is a community property state.

If you are the executor of an estate or the family member of someone who died in debt, it is critical to understand your rights and any liabilities regarding the decedent's debt before you agree to settle with creditors. Speaking with an experienced estate planning attorney may be the best way to ensure that you don't end up paying any more than is legally owed and payable by the estate.

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