Upon death, a person's property is first used to pay for probate and funeral expenses, then to pay debts. Generally, all debts must be paid before assets are distributed. Your outstanding credit card balances, for instance, will be paid before gifts are distributed to your heirs.
Can a Will Distribute Secured Debts?
A major exception to this general rule is for "secured debts," such as home loans or auto loans. In the case of secured debts, property can be distributed with its debt. In other words, let's say you have a car worth $10,000 and have a $5,000 loan on the car. You can leave the car to someone, but it will be that person's obligation to pay off the loan.
What Happens if You Owe More than You Own?
In general, people cannot inherit another person's debts. If there is not enough cash to pay your debts, then all property will be sold to pay the debts, and no one will inherit anything. For example, say that you owe $12,000 in credit card debt but only have cash and property worth $10,000. In that case, the property will be sold by the court. The $10,000 will be paid to the credit card issuer.
You might be able to imagine a situation in which some property would have to be sold to pay off debt but there would still be assets left to distribute. This could lead to some difficult decisions. The executor is responsible for deciding which pieces of property are sold. The LegalZoom Last Will and Testament contains a clause that directs your personal representative to pay off all debts and obligations as soon as practical, including all estate and gift taxes.
Receiving and Forgiving Debts in a Will
What if someone owes you money? This money would usually be collected and added to your overall estate. However, you can always choose to forgive debt in a will. This would be similar to a specific gift, but instead of leaving something to someone you would be forgiving a specific debt.
