There is a lot to know about debt and debt collection, but one thing that many people never bother to ask is what happens to those outstanding balances after the death of a debtor. In many cases, the deceased never realized that their outstanding debts would need to be paid off by their assets, which results in them passing on far less to their family members than they expected to.
In order to make sure that you have a solid understanding of what is going to happen to your belongings after you die, you first need to understand what will happen with your debts. And if you want to get to the bottom of that issue, we have to start by understanding what your estate will look like.
Debts Against the Estate
When someone dies, all of their assets and outstanding debts are placed in what is called an estate that is managed by an executor. This executor is often named in the deceased’s will, but can also be appointed by a local court.
The job of the executor is to liquidate as many of the deceased’s assets as is necessary to settle all of their outstanding debts. Whatever is left as property of the estate can then be divided up amongst the heirs to the estate.
The Job of the Executor
In addition to being in charge of liquidating assets to pay off debts, the executor of an estate is also in charge of closing any credit accounts for the deceased and reporting the death to each of the three major credit reporting agencies.
It is not uncommon for the executor to open a separate bank account for the estate to manage all of the income from the sale of assets and the payments of any outstanding debts. Once the entire estate is settled, this account can be closed for good.
Don’t Give Away the Belongings Just Yet
Many executors make the mistake of beginning to pass out family heirlooms shortly after the funeral. However, it is important to make sure that the debts of the estate are all taken care of before any assets, not matter how small, are permitted to be given away.
In some cases, there could be outstanding debts that even the deceased themselves didn’t know about, so it is always best to wait at least a few months before dividing up those family heirlooms among the heirs.
The Big Exception
In cases where the debts of the deceased outnumber their assets, the debts do not pass through to the family or the executor like assets would. In these cases, the creditors are simply out of luck as there is nothing left in the estate to pay them with.
The one exception to these instances is when the outstanding account has a listed cosigner who is still alive. In these cases, the entire balance of that specific debt would then follow through to the cosigner.
Dealing with settling an estate during a time of mourning can be extremely traumatic for even the most level-headed executor. But making sure that you understand how the process works before jumping in haphazardly and trying to close the estate quickly can make the difference between settling it properly and being frustrated to find out there are still issues months down the road.