The responsibility of paying a debtor's bills after death falls on the estate rather than on heirs receiving an inheritance. After a death, the executor of an estate is responsible for notifying creditors and paying existing debts using funds available to the estate, either with cash or liquidated assets. Although heirs will not be paid an inheritance until after debts are fulfilled, they usually do not have any financial obligation to creditors.
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Debt Priority and Estate Insolvency
Not all debts owed by an estate are treated equally; if and how creditors are paid depends on whether the debt is secured or unsecured. Secured debts, such as a house or a car, are paid first, and unsecured debts, such as credit card debt, are paid only if there is enough money remaining in the estate. Heirs are not paid until both secured and unsecured debts are settled; therefore, if the estate is insolvent, there will not be an inheritance.
Financial Obligation of Heirs
With limited exceptions, heirs are not obligated to settle the remaining debts owed by an estate if there are not enough assets to satisfy all creditors. It is not unheard of, however, for creditors to attempt to collect a decedent's debts from heirs. When faced with persistent collection calls regarding debts owed by the estate, heirs have the right to demand proof they are responsible for the debt; absent such proof, heirs have the right to demand creditors stop any and all collection efforts.
When an Heir Is Financially Responsible
Heirs, particularly surviving spouses, could be financially responsible for an estate's debt in certain limited circumstances. Heirs are liable for debt if they co-signed on a loan or opened a joint account with the deceased. Surviving spouses are always responsible for joint tax debt owed to both the state and federal government. Some states have community property laws, making a surviving spouse responsible for most types of debt acquired by a decedent spouse during the marriage, while others hold the surviving spouse liable for only certain types of debts, such as health care expenses.
Assets Not Available to Creditors
Every state has laws that protect certain assets from creditors, meaning heirs will receive assets, or their value, regardless of debt owed by the estate. Although state laws vary in what assets are protected, the following are typically safe: proceeds from life insurance plans, retirement accounts and pension benefits, personal property up to a certain value, cars up to a certain value, and unemployment or worker's compensation payouts. Generally, homes are also protected from creditors, but heirs are still required to pay the mortgage to avoid foreclosure. Heirs can consult the laws of their state to determine whether their inheritance falls into a protected category, even if the estate has debts.