What Happens To Unpaid Bills When You Die?

what happens to unpaid bills when you die

Creating an estate plan supports your vision of distributing the estate amongst heirs, beneficiaries, friends, or favorite charities and organizations from a heart-centered standpoint.  

From the state’s perspective, your estate plan or the probate process ensures bills and debts are settled before anyone else benefits. 

Your Estate Pays Unpaid Bills and Debts  

Ultimately, your estate pays all bills and uncollected debts that exist up to the date you died. This all happens methodically and systematically, facilitated by your personal representative, trustee, or administrator 

Who’s Responsible for Bills & Debt After You Die? 

This is what the Federal Trade Commission (FTC) has to say about death and bills/debts: 

As a rule, a person’s debts do not go away when they die. Those debts are owed by and paid from the deceased person’s estate. By law, family members do not usually have to pay the debts of a deceased relative from their own money. If there isn’t enough money in the estate to cover the debt, it usually goes unpaid. But there are exceptions to this rule. 

The majority of the exceptions fall into the following categories: 

  • You are married and live in a community property state like California 
  • Your spouse is legally required to pay certain expenses (like medical bills) 
  • There is a co-signer 
  • There was a joint account holder, credit cardholder, etc. 
  • You were legally responsible for settling the estate and didn’t adhere to probate laws 

Let’s review what happens to unpaid bills after you die in various scenarios. 

You Have an Estate Plan 

In scenario one, you’ve taken care of business and have an estate plan. This is the best model because it already takes unpaid bills and debts into account.  

When you create your estate plan, wills, trusts, etc., your estate planning attorney considers existing and expected debts and expenses, including any related taxes. These ideas are part of an estate plan, and your trustee (executor, administrator) follows instructions to ensure it is taken care of. Bills and debts are the first items “settled.” Then, the rest of the estate is distributed according to your wishes. 

You Do Not Have an Estate Plan or Will 

If you don’t have an estate plan with a designated trustee or executor, the entire estate usually goes into a probate process. It is far more convoluted and time-consuming because the state officially chooses “the administrator” and dictates the method according to their long-established probate processes and protocols. 

In this model, a family member typically volunteers to take on the administrator role, and their role is approved or denied by the state. If there isn’t a qualified family member, the state takes care of the probate process and bills the estate. In that example, all of the bills and debts are paid out of the estate. Any remaining property, assets, or financial accounts left are distributed to the heirs and beneficiaries by the court using a particular relationship order. 

If a relative passes away without a spouse or a will/estate plan in place, we highly recommend consulting with an experienced probate attorney. The money you spend having the attorney handle probate is typically reclaimed via efficient and timely probate handling that saves fees, penalties, and unnecessary taxation. 

We also recommend reading What Happens When You Die Without a Will in California to learn more about the probate process. 

You are married 

Unless your will or estate plan specified otherwise, your spouse automatically takes over the estate once you die. In that case, your spouse’s bills and debts continue to be paid until the debts are settled.  

This is one of the reasons life insurance policies are so helpful. If there aren’t enough liquid assets to cover your existing bills or debts, the insurance policy proceeds to pay those off and relieve that burden from your spouse and children. 

You have no heirs or beneficiaries 

If you are not married and you have no heirs or beneficiaries, the estate goes through probate. If there isn’t enough value in your property, assets, and financial accounts to pay off your debts, they are absolved. If, however, there were any co-signers or partners involved, they automatically assume that debt.  

There is a misconception that estate planning is something that only married people or wealthy people do and that singletons or those without children don’t need to create an estate plan. That is simply not so. Visit our posts, Estate Planning for Singles and Is Estate Planning Necessary if You Don’t Have Kids to make more informed decisions. 

What About Student Loans and Medical Expenses? 

Some bills and debts are viewed differently than others.  

For example, if a person dies with student loan debt and the estate can’t absorb the debt, or if paying that debt leaves heirs in a tight spot, a family member can apply for a “loan discharge due to death.” If it is accepted, the lender absorbs the remaining debt. This is fairly common for federal student loans but is less available if loans were consolidated and/or taken over by a private lender. Private lenders often have more stringent guidelines and may still demand payment from the estate. 

Medical bills are almost always the responsibility of the spouse or the estate to pay. If the value of the bills exceeds the value of the estate, the remaining balances are absolved. Similarly, some hospitals or clinics are willing to reduce a percentage of total bills if the estate cannot handle the bills or paying them leaves a spouse destitute. Again, this scenario would be worth a consultation with a probate attorney who advocates on your behalf.

We’re Here To Answer All Of Your Questions

Do you have questions about how bills and debts will be settled after you die? Do you need legal advice about how to pay bills and debts in probate? Contact Tseng Law Firm and schedule a free consultation.