What Happens to Your Unsecured Debt After You Die?

If you are not financially capable of paying off your unsecured debts prior to your death, the courts take over responsibility for sorting out your affairs. A variety of factors, such as your assets, your state's probate laws and if you share payment responsibility with another individual, contribute to when and how your creditors get paid. In certain situations, however, unsecured creditors do not receive payment at all.

Facts

Unsecured debts are those that are not tied to your assets -- leaving nothing for a creditor to seize if regular payments should stop. Common examples of unsecured debt include credit card debt, student loans and personal loans. If you stop paying unsecured debt while alive, a creditor can sue you and attempt to secure its debt with a lien against your assets. Once you die, however, your unsecured creditors' collection rights are limited.

Legal Process

Whether or not you leave behind a will, your assets go into probate when you die. Each creditor will then file a claim against your estate for the outstanding amount you owe. Your estate's representative -- either appointed by you in your will or appointed by the court -- will distribute your assets to your creditors until all of your debts are paid. Only once your debts are paid will your beneficiaries receive their inheritance. If your debts exceed your assets, only some of your creditors will get paid.

Time Frame

Each state's probate process differs, but all states only give creditors a limited amount of time to file claims against your estate. "The New York Times" notes that many creditors use computer programs that regularly scan probate listings for customers' names to file timely probate claims. If an unsecured creditor fails to file a claim against your estate, it will not receive payment.

Considerations

If you hold any joint accounts, such as joint credit cards, with a loved one, that loved one retains full responsibility for paying off the account balances after your death. This is because, as joint account holders, both of you share the same degree of responsibility for the account -- even if only one of you incurred the debt. Unsecured creditors can pursue the living account holder for payment and thus cannot file a claim with the probate court. In general, however, your family members are not responsible for paying your unsecured debts after you die.

Effects

Unsecured creditors who do not receive payment after your death -- either due to not filing a prompt claim or your estate not containing enough money to pay off each of your debts -- usually write off the unpaid debts as a loss. The Internal Revenue Service allows businesses to claim uncollectible debts as tax deductions. This lessens the financial loss your creditors suffer from not receiving payment after your death.