Many people wonder what will happen to their debts when they pass away; after all, it’s not something most people want to leave behind for their loved ones to handle. In California, handling debts after death is straightforward, but there are a few things to understand.

Firstly, your debts become a part of your estate. The estate is everything you own at the time of your death, including your assets and liabilities. An executor, whom you would have named in your will, will be responsible for settling your debts using the assets from your estate.

 

My Estate Pays Off My Debts

The executor will pay off your debts from the assets in your estate. This includes selling off assets if necessary to generate the funds needed to pay the debts. If there are not enough assets to cover all of the debts, then the unpaid debts may be forgiven or written off by the creditors. However, certain debts like tax liabilities and child support may still need to be paid.

 

What If My Assets Don’t Cover My Debts?

When your assets do not cover your debts, this is often called “insolvent.” In such cases, creditors may take legal action to try and recover the money they are owed. Here are some key points to consider:

1. Probate Process: When you pass away, your assets and debts will be handled through probate. During probate, your assets will be used to pay off your debts before any remaining assets are distributed to your beneficiaries.
2. Secured vs. Unsecured Debts: Secured debts are tied to a specific asset, like a mortgage on a home or a car loan. If you default on a secured debt, the creditor can take the asset to cover the debt. Unsecured debts, like credit cards or medical bills, are not tied to a specific asset.
3. Joint Debts and Co-Signers: If a family member co-signed a loan with you or is a joint account holder, they may be responsible for the debt if you cannot pay. This can also apply to spouses in community property states, where debts incurred during the marriage may be the responsibility of both spouses.
4. Exempt Assets: Some assets are protected from creditors, even if you are insolvent. The specifics of what is exempt can vary by state, but it often includes retirement accounts and a certain amount of equity in a primary residence.
5. Negotiating with Creditors: If you are unable to pay your debts, you can deal with your creditors to settle the debt for less than what is owed or to work out a payment plan that is manageable for you.
6. Bankruptcy: In some cases, filing for bankruptcy may be an option. Bankruptcy can provide a way to discharge certain debts and get a fresh start. However, it is a complex process with long-term consequences.

 

What About Secured Debts in California?

For secured debts, like a mortgage or car loan, the lender can take back the property if the loan is not paid. If I pass away, the lender may allow a family member or beneficiary to take over the loan, or they may require the loan to be paid off or the property to be sold to pay off the loan.

 

What Happens to My Student Loans?

When it comes to student loans, how they are handled upon death can vary based on the type of loan and the specific terms of the loan agreement. Here are some types for you to consider: 

1. Federal Student Loans
2. Private Student Loans
3. Cosigners and Joint Loans
4. Life Insurance
5. State Laws

It’s essential to read the terms of your loan agreement carefully and consult with the lender or a financial advisor to understand your specific situation and options.

 

Contact me, an Experienced California Estate Planning Lawyer.

Understanding what happens to your debts when you pass away in California is crucial to estate planning. It’s part of ensuring your family and loved ones are not left with a financial burden after you are gone. If you’d like to learn more about this, I’d happily discuss it. Just reach out. I don’t bite, and your consultation is free. Call me today at (805) 307-7713 or contact me online at www.ridleylawoffices.com for a free initial strategy session and get the help you deserve.