Many people dread the death of a loved one because that means their loved one isn't around any longer. For some people, the death of a loved one brings up a new horror -- debt collectors.
Some people think that the loved ones who are left behind will have to cover the debts of the person who passed away. This isn't the case. In most cases, the debts of a person who dies will go unpaid unless the person's estate can pay those bills.
When the estate covers bills
When the estate covers the bills, they are paid in a specific order. Each bill is assigned a priority level. The highest priority bills are paid first and the estate moves down the list to determine what is going to be paid. When the estate runs out of money, the bills stop getting paid.
If the estate has enough money or assets to cover all the bills, those bills will be paid. Whatever is left will be able to be divided according to the person's estate plan.
There is one exception to the general guideline that loved ones don't have to pay the debts of a person who died. This occurs when an asset is co-owned. For example, if the person's spouse still lives in the house and there is a mortgage on it, the living spouse will still need to pay for the mortgage payments or they risk losing the home to foreclosure.
In some cases, protection programs might kick in when a person dies. These could potentially forgive the debt. Anyone who has a co-owned asset with a person who has died should contact the creditor to find out what options they have to deal with the debt. Restructuring payments or similar arrangements might be possible.
Ways to protect assets
Some people take steps to protect assets from debt collectors. By placing assets in certain trusts, the assets are protected. For example, a life insurance trust would prevent creditors from being able to claim proceeds from the life insurance. There are also some tax considerations that must be factored into the situation when trusts are in the picture.
If trusts are part of the estate plan that is present when a person dies, the trust's assets will be distributed and handled according to the plan that the person made before they died. Trusts give the person who creates them the ability to set stipulations and conditions on when and how the assets are distributed.