Savvy Living

"What happens to a person's debt after they pass away? At age 78, I have accumulated quite a bit of credit card and medical debt over the past few years and am concerned about leaving my son and daughter with a big bill after I pass away. What can you tell me?"

In most cases when a person with debt passes away, it's their estate, not their children, that is legally responsible. Here's how it works.

When you pass away, your estate – which consists of the stuff you own while you're alive (home, car, cash, etc.) – will be responsible for paying your debts. Whatever is left over is passed along to your heirs as dictated by the terms of your will, if you have one. If you don't have a will, the intestacy laws of the state you reside in (see mystatewill.com) will determine how your estate will be distributed.

If, however, you pass away broke or there isn't enough money left over to pay your unsecured debts – credit cards, medical bills, personal loans – then your estate is declared insolvent and your creditors (those you owe) will have to eat the loss.

There are, however, a couple of exceptions that could make your children legally responsible for your unsecured debt after you pass away: if your son or daughter is a joint holder on a credit card account that you owe on or if they co-signed on a loan with you.

Secured debts – loans attached to an asset such as a house or a car – are another story. If you have a mortgage or car loan when you pass away, those monthly payments will need to be made by your estate or heirs, or the lender can seize the property.

Untouchable Assets

You also need to be aware that there are some assets, such as 401(k) and 403(b) accounts and some life insurance policies, that in many states creditors cannot reach. That's because these accounts typically have designated beneficiaries, and the money goes directly to those people without passing through the estate.

Tell Your Children

If you haven't already done so, you need to inform your children and the executor of your will of your financial situation so there are no surprises after you pass away.

If you do indeed pass away with debt and you have no assets, settling your estate should be fairly simple. Your executor will need to send out letters to your creditors explaining the situation, including a copy of your death certificate, and that will probably take care of it. But, your children may still have to deal with aggressive debt collectors who try to "guilt" them into paying.

If you have some assets, but not enough to pay all your debts, your state's probate court has a specific list of what bills get priority. The details vary by state but generally estate administrating fees, funeral expenses, taxes and last illness medical bills get paid first, followed by secured debts and lastly credit card debts.

Get Help

If you have questions regarding your specific situation, you should consult with an attorney. If your need help locating one use findlegalhelp.org, a consumers' guide created by the American Bar Association that offers referrals and links to free and low-cost legal help in your area based on your income level. If you don't have internet access, call the Eldercare Locator at 800-677-1116 for referrals.

Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Senior" book. The articles are offered as a helpful and informative service to our friends and may not always reflect this organization's official position on some topics. Jim invites you to send your senior questions to: Savvy Senior, P.O. Box 5443, Norman, OK 73070.