Deceased and in Debt

How to handle the debts of a loved one who dies

When a loved one dies, settling their estate involves more than distributing assets. In many cases, it also means taking care of the person’s debts.

Decades ago, older adults rarely had a mortgage, car loan, student loans, or credit card debt. But in recent years, more older adults have been shouldering debt well into their 70s and 80s. For instance, 27% of homeowners age 80 and older have a mortgage, and 28% of adults 75 and older carry credit card debt. 

No matter the type of debt, the family of a deceased loved one needs to address it when settling the financial affairs of the deceased person, which is referred to as the estate. 

“A decedent’s estate consists of the total assets and liabilities of the person who passed away,” says William Wilson, an attorney who owns Wilson & Wilson Estate Planning and Elder Law, LLC in LaGrange. “The estate is a separate entity that holds these assets and liabilities for creditors and beneficiaries.”

Settling the estate can take anywhere from six months to several years, with probate estates usually taking the longest. During the process of settling, debts are paid and the remaining assets are distributed to heirs or those named in the estate planning documents, Wilson says.

In many cases, the estate will be settled through probate court. In Illinois, the estate of anyone who dies with assets of $100,000 or more, including real estate, and not held in trust, automatically goes to probate court. This happens whether or not the decedent had a will, says Kerry Peck, managing partner of Peck Ritchey, LLC in Chicago. 

Types of debt

There are two types of debt: secured and unsecured. 

Secured debt is any loan that is secured by property, such as a mortgage or car loan, Peck says, and it’s discharged by selling the property. The mortgage will be paid from the sale proceeds. After the loan is paid, any remaining funds are distributed to beneficiaries. 

It’s important for the executor of the estate and the beneficiaries to keep in mind that mortgage lenders usually will not waive mortgage payments while the estate is being settled. The estate executor and the beneficiaries have options: 

  • They can choose to ignore mortgage payments during the settlement and let the foreclosure process begin. 
  • They can pay the mortgage using funds drawn from the decedent’s checking and savings accounts. 
  • The beneficiaries can make mortgage payments with the expectation of getting that money back after the house sells. 

“From our experience, beneficiaries pay the lender with estate monies or their funds until they sell the asset,” Wilson says.

Unlike secured debt, unsecured debt — such as credit card bills and medical debt — is not automatically paid. To receive payment, creditors must file a claim within six months of the decedent’s death, Peck says. To alert creditors so they can file a claim, the estate’s lawyer must notify creditors that the person with the debt has passed away. In addition, the representative must publish notice in the local paper, and creditors usually monitor obituaries as well, he says. 

Creditors calling

Once they learn of the person’s death, creditors can file a claim for payment, but there’s no guarantee they will receive the full amount owed. 

“They file a claim in probate court, and the judge adjudicates and decides how much money the creditor should get,” Peck says. 

If there isn’t enough money in the estate to pay off all the unsecured debt, the creditors are paid in a set order with the money available, Wilson says. Funeral expenses, estate administrative expenses, and custodial claims are paid first, followed by unsecured debt in other categories, such as credit card debt and medical bills.

If a credit card company or other unsecured lenders pressure family members to pay what’s owed, they should not do so until the estate’s representative determines that there is enough money to pay the credit cards. If there’s not enough cash or assets to sell, which will create cash, then the estate should pay the debts in the order described above. Family members are generally not responsible for any of their loved one’s debts, unless they co-signed a loan, Wilson says.

While today it’s unrealistic for all adults to be completely debt-free, it’s crucial to be transparent with loved ones about debts owed — or at least to tell family members where to find the information. That way, there won’t be any unpleasant financial surprises after the person dies.

“One of the biggest problems when somebody dies is that [the executor] doesn’t know where the paperwork is,” Peck says. “For example, a credit card company says, ‘Your father owes $10,000,’ and [the family] is taken aback by that. Make sure your family and executor are aware of all the loans.”