What Happens When a Deceased's Unsecured Debts Are Not Paid by the Estate?

Collection calls can be difficult to deal with, especially when they are not for your own debts, but those of a deceased relative. If a loved one recently died, you may be unsure about how to handle the debts and how to settle them. You are not responsible for the debts of another person, even if you were related.

Settling the Estate

When someone dies, both debts and assets they leave behind become their estate. If the person made a valid will, it names an executor, who becomes responsible for settling the debts and passing on remaining assets to the heirs, or as otherwise instructed in the will. For estates of some value, which varies by state, this process is supervised by a probate court. When a will is absent, then the court appoints an administrator. The executor or administrator use any assets, including real estate, car, stocks and savings, to discharge the debts. Probate courts in most states dictate that burial costs, medical bills, taxes, lawyer costs and court fees have priority over other unsecured debts. When all the debts have been paid off, the executor will report this to the court and divide any remaining assets as instructed by the will and approved by the court.

Insolvent Estate

If the the estate runs out of money before all debts are paid, then the estate is insolvent. Once the assets have been used up, companies must forgive any unsecured debts. Generally, the executor tries to divide the remaining assets equally between the unsecured debts, so each company gets a portion of the money.

Debt Collectors and Decedent's Relatives

Even though the debts must be forgiven by law and do not transfer to relatives upon death, many debt collectors try to contact the nearest living relative to secure payment. You do not need to pay these, as you are in no way responsible, as long as you were not a cosigner for the debts. You can request that the company stop contacting you and file a complaint if they do not.

Life Insurance and Beneficiary Assets

Life insurance and other financial instruments, like retirement savings, are not considered a part of the estate, if the deceased named beneficiaries for them. They do not need to be applied to the debts if the beneficiaries do not wish to do so. The beneficiary listed on an insurance policy or other asset is the only person who receives money from them. For example, if a life insurance policy names only one child as beneficiary, he does not need to contribute the money to the estate or share it with other siblings. However, if you are both a beneficiary and an heir, you may wish to have the executor pay off debts with this money, if you want to keep another asset in the estate, the family home, for example.