When someone dies with a negative net worth, it means he owes more money than the cash value of everything he owns put together. Those assets, as they're called, include things that are worth money, but are not cash. Debts are paid in cash, though, so when someone dies in debt, all his assets are sold, and then the debts are paid in order of a priority set by state and federal law.
Assets and Estates
Dying in debt is not the same thing as dying without assets. It's fairly unusual for someone to die with no assets at all. The deceased person with a negative net worth typically has enough assets to pay some of the debt, but not all of it. After a person dies, all his assets put together are called the estate. There may be cash in the bank, but there may also be stocks, a house, a boat, fancy jewelry and entire businesses. Selling them requires time and paperwork, and those tasks are the job of the estate's administrator.
If the person has any assets at all, the first priority for payment is funeral costs, followed by medical bills. Taxes come next. "Necessary" administrative expenses, as determined by the Internal Revenue Service, are paid before federal taxes if there is not enough money for both. Attorney's fees are administrative expenses. So are probate fees, other court costs, appraisal costs and tax preparation costs. Probate is the process of verifying a will and distributing the assets. The whole administrative-expense category has a creditor line of its own, and state law decides where in the line each creditor stands. State law also governs estates with no will.
Secured debts come next in the order of payment. Secured debts are loans backed by collateral, such as a mortgage on the family home. If the mortgage is half paid, the mortgage lender owns half the house. The rest of the mortgage has to be paid right away, in cash, so the estate sells the house. Even if you take over the mortgage, the transaction is usually handled as if you're buying the house. If any of the mortgage dealings involve attorney's fees, or if you need to dispute any other part of the estate, you must pay the lawyer out of your own pocket.
Credit Card Issuers Lose Out
Unsecured debts, including credit-card debts, are last in the priority line. Credit card debts are not the survivors' responsibility unless a survivor is a joint owner of the account. That's all there is to it in most states. If you live in a community property state, in which married couples are considered joint owners of all their assets, you'll need to look into state laws. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska has community property laws as well. Creditors who bill or call heirs demanding they pay the balance are breaking the law.
Out of Creditors' Reach
As for business interests, sole proprietorships such as medical practices are usually liquidated unless arrangements for a sale have been made in advance. The estate pays debts with the proceeds. In general, the states decide what assets are outside creditors' reach. In Texas, the decedent's interest in a partnership is not part of the estate. The partner's income during the year of death, however, is taxable. In Texas, too, surviving heirs can keep items from the deceased person's personal property totaling $60,000 in value -- $30,000 for a sole heir. Check your state's laws for more information.
- Hemera Technologies/AbleStock.com/Getty Images