What Happens to Debt When You Die in Maryland?

The lenders for car loans, credit cards, private student loans, and other debts have a right to pursue the balance of your debts after you pass away. So, what happens to debt when you die? In cases where the lender made a secured loan, the lender can reclaim the property if the estate can’t continue to make payments. Unsecured debts have a lower priority in settling the estate’s debts.

This article describes different debt solutions for family members trying to settle a loved one’s estate below. Read on to learn more about leaving debts behind when you pass away.

What Types of Debt Can Be Inherited?

Your spouse or family members cannot inherit your debt if they do not co-sign the debt. Instead, your estate inherits and must pay the debt before the executor of your will can distribute your remaining assets to your beneficiaries. This is a process called “probate.”

In 2017, Maryland repealed its filial responsibility law, an old piece of legislation from when the country had debtor’s prisons. States that still have these laws see cases where a creditor holds adult children responsible for their parents’ debts. The Maryland repeal disallowed creditors from pursuing children for their parents’ poor financial decisions, restricting creditor claims against family members.

If a surviving spouse is a joint account holder or co-signer of the debt, that spouse will inherit the debt. However, Maryland is not a community property state, meaning your spouse will not inherit your debt if it isn’t a shared debt.

What Happens to Credit Card Debt or Student Loans?

Creditors must file for repayment with the estate during the creditor claim period in probate. If an estate’s value is less than the debt the decedent owes, the estate is “insolvent.” Based on where each creditor falls within the priority hierarchy and the value of the estate, lower-ranking creditors may never receive the full debt incurred by a decedent.

In Maryland, some creditors receive priority over others. The IRS, your estate administration attorney’s legal fees, and lenders with a secured loan receive priority over unsecured loan holders like credit card companies.

Can My Family Members Still Benefit From My Life Insurance Policy if I Have Debts?

Your life insurance beneficiaries will receive payments from your policy when you pass away. The money does not go into your estate or enter probate. However, those family members may wish to use those funds to repay any debts. For example, if there is still a balance on the mortgage and the family lives in the home, the beneficiaries may wish to use those funds to pay off the mortgage.

Contact Our Maryland Estate Administration and Probate Attorneys

So, what happens to debt when you die? The answer can be complex, depending on your situation. For help with estate administration and probate in Southern Maryland, contact us at the Powers & Worshtil, P.C. Call today at 301-627-1000 or contact us online to schedule a consultation.