What happens to your debt after you die?
Hi. I’m Gary the founder of Dewitt Law.
Today, I’m going to talk about what happens to your unsecured debts when you die and who owes them.
Much of this information comes from Arkansas law and the Fair Trade Commission website at https://www.consumer.ftc.gov/articles/debts-and-deceased-relatives.
As a rule, unless your family co-signed for the unsecured debt, they do not owe it. And, your final medical expenses, which can be very high, are considered a debt. Unsecured debts are things like credit cards, lines of credit, medical bills, etc.
But your unsecured debts don’t go away either. Your debts are owed by and paid for from your probate estate in Arkansas. If there isn’t enough money in your probate estate, the debts go unpaid or partially paid.
Secured debts, like mortgages, don’t go away and are inherited with the property.
Did you catch that your “probate estate” is responsible for your debts? What about money and property that passes outside of probate like life insurance, retirement accounts, and more?
In general, money that passes outside of probate cannot be used to pay your debts! The more you pass outside of probate, the less is available to your creditors.
This is a great reason to create an estate plan. If you can just get your house to pass outside of probate, you have saved more than the cost of an estate plan. Think about how much money, time, and grief you can save your family by making sure that almost everything passes outside of probate. Since that money doesn’t have to be used to pay your debts, you can save them even more.
If you don’t plan, and probate is opened, then your executor is responsible for approving and paying your debts. Those debts must be paid in probate, even if it means selling your assets to pay the debt.