Upon death, an individual's assets and property are first liquidated to pay for probate and funeral expenses, then to pay off outstanding money owed. Typically, all debts must be settled before assets are divided amongst heirs. For example, any outstanding credit card balances will be paid off before gifts are distributed.

The principle exception to the general rule that debts must be settled is for "secured debts," such as home or car loans. If you are distributing property that is a secured debt, your heirs can inherit it with its debt in tow, instead of selling off the property to cover the debt. For example, let's say you have a car worth $15,000 and have a $7,000 loan on the car that still needs to be paid off. You can leave the car to someone, but it will be that person's obligation to keep paying the loan.

What will happen if you owe creditors more than you own? Will your debts become a burden on your heirs? Fortunately, in many cases, people cannot inherit another person's debts. If you do not own enough when you die to cover your debts, the government will sell all property, and your heirs will receive nothing. For example, say you owe $20,000 in credit card debt but your net worth is only $10,000. In that case, your assets will be sold by the court, and the credit card company will have to settle for $10,000.

In some cases, property has to be sold to cover debt but some distributable assets will be left over. If this situation comes to pass, heirs and executors of wills face some difficult decisions. The executor named in the will is responsible for figuring out which pieces of property are sold and which are left to distribute.

We've covered what happens if you owe money to someone else, but what if someone else still owes you money when you die? Typically, this money would be collected and added to the value of your overall estate. However, you can always use your will to forgive a debt. Similar to a specific gift, instead of leaving a specific material object to someone, you could forgive a specific debt.

LegalZoom is not a lawfirm and can only provide self-help services at your specific direction. Information contained above is subject to change and is not applicable to every state. Visit LegalZoom.com for specific state-by state-documents.

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