It’s quite common to die with debt in your name. When you die, most of your debts are collected from the value of your estate (everything you owned at the time of your death). In some cases, if you took out a joint mortgage with your spouse or live in a community property state, for instance, others may be responsible for your debts.

How Debt Is Handled After Death

Probate is the legal process for distributing your property after you die. During probate, a special court will validate your will and authorize someone to distribute your estate to your beneficiaries as you requested. They will also ask them to pay any taxes your estate may owe.

In the event you do not have a will, a court proceeding will be held to determine how to divide your estate. The court will name an administrator for your estate who will be required to follow the judge’s directions on how to distribute your property.

Since probate laws differ from state to state, it’s important to familiarize yourself with the legalities of probate where you live. This will help ensure that your final wishes are properly carried out.

Who Is Responsible for Debts of a Deceased Relative?

After you die, your debts will be classified as secured and unsecured. Secured loans such as mortgages and auto loans are backed by collateral—assets that can be taken by the lender if they don’t get repaid. Most credit cards, student loans and other unsecured loans lack collateral.

Depending on the assets of your estate and the provisions you make before you die, your estate could entirely pay off your secured debts or make installment payments through a trust or other legal entity. Also, your property may be sold, refinanced or turned over to the lender to take care of the debt.

Any unsecured debts that belong to you will likely need to be paid from your estate. If you die with Kshs.1,000,000 in your savings account and 500,000 in bank loan debt, for example, the lender would usually be paid before the remaining 500,000 can be distributed to your heirs.

If there are multiple creditors with total claims greater than the amount held by your estate, the laws in your county will determine who gets paid and how much. Your unsecured debts will go unpaid if your estate lacks sufficient funds to cover them.

Which Debt Can Be Inherited?

If you leave a will behind, the person appointed to distribute your estate (the executor) will collaborate with your creditors and survivors to settle any outstanding debts you may have. A probate court will handle this if there is no will.

To determine what debts you owe, the executor or probate officer will likely access your credit report and take a look at your open credit accounts. Then, they’ll figure out which debts are inherited and must be paid off. Inherited debts may include:

• Joint debts: The most common example of a joint debt is a mortgage. If you took out a mortgage with your spouse, they’ll be on the hook for paying it off if you die. Car loans, credit cards, lines of credit and almost any type of debt can be joint debts.
• Cosigned debt: A cosigner agrees to pay your debt in the event you default on a loan. If you had someone cosign any of your loans, they’ll be responsible for the debt if you die. For example, if you had a credit card that only you used but your parent cosigned years ago when you were young, they’ll be required to cover it.
• Timeshares: If you purchased a timeshare and put the names of your heirs’ on the deed to make it more convenient for them to use the property upon your death, your children will inherit the timeshare and be forced to pay the annual maintenance fees that come with it.

Which Assets Are Protected From Creditors?

• Life insurance: Life insurance is a contract you sign with an insurer so your beneficiaries are paid a lump-sum payment or death benefit when you die, as long as you make premium payments.
• Living trust: With a living trust, you can pass on property while avoiding the expenses and delays that often come with probate. A living trust is considered a valuable estate planning tool.
• Brokerage accounts: Any taxable investment account you open with an investment company or brokerage firm is referred to as a brokerage account. You may invest in stocks, bonds, REITs, CDs or other investment vehicles within a brokerage account.