When Debt Is Left

Larry Sayler

WHAT HAPPENS WHEN a person dies without a will and there isn’t enough money to pay all of his or her debts? Who gets paid and who gets shorted?

I’d always heard that funeral expenses were the first priority, and then unsecured creditors got everything else. I’ve recently learned from personal experience that the rules are more complex—and more generous to widows and widowers.

A 60-year-old friend of mine recently died. He hadn’t written a will. I’m helping his widow sort through bills and decide who gets paid. My friend was secretive and shared no financial information with his wife. She had no idea who was owed money and how much.

It turns out my friend was drowning in debt. We’ve determined that he owed at least $60,000 on various credit cards and personal loans. The couple’s income was $2,500 a month, and nearly half of that was spent servicing debts.

The silver lining is that all of this debt was in his name only, so his wife isn’t responsible for repaying it. He made the minimum payments on time, so his credit score was a pristine 750. Periodically, he would find a firm that would extend him another personal loan, which he would use to help keep current on his other obligations.

His few assets included four cars in various states of disrepair, all with high mileage and at least 10 years old. He also had a joint checking account with his wife with about $1,000 in it. His personal possessions, mainly clothes and a few books, have no monetary value.

It was easy for his widow to close their joint bank account and transfer the money to a new account in her name only. Extracting value from the four cars is going to be harder.

One car was registered in both their names, so she’s entitled to it. The Department of Motor Vehicles will issue a new title in her name only. The other three cars, because of their age and condition, are worth about $7,000 altogether.

One question that haunted me was whether his widow would get anything from the disposition of the three cars. Because he owed so much money, wouldn’t it be fair to give that money to his creditors to split?

On the other hand, his widow is struggling financially, so anything would help. Although she has no debts, her income is only $1,400 a month, a combination of Social Security and Veterans Affairs survivor benefits.

My question was settled by state law in Illinois, where the widow lives. She gets to keep the proceeds from the sale of the three cars, thanks to a law that looks out for surviving spouses. A widow is entitled to a minimum of $20,000 before most other creditors receive anything.

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Illinois has defined seven classes of creditors when dividing an estate. Each higher class must be fully paid before anyone in a lower class gets a cent. Here’s how the various creditor classes are sorted:

  • Class 1: Funeral and burial expenses. This includes estate administration expenses, such as executor, legal, CPA and filing fees. It also covers any fees owed to a live-in caregiver for the decedent.
  • Class 2: Surviving spouse and children. They receive an amount necessary to support the surviving spouse and any minor children for nine months, with a minimum of $20,000 for the surviving spouse and $10,000 for each surviving minor child.
  • Class 3: Debts owed to the U.S. government.
  • Class 4: Expenses associated with the decedent’s final illness, plus amounts owed to any employees, capped at $800 per employee.
  • Class 5: Property and money held in trust for others that’s been mixed with the decedent’s other assets and cannot be separately identified.
  • Class 6: Debts owed to Illinois and any city or other municipality.
  • Class 7: All other creditors.

In my friend’s estate, the Class 1 creditors are owed about $3,000, all related to his funeral expenses. They will be fully paid. His widow, in Class 2, gets all the rest.

The credit card and loan companies that my friend owed money to? They’re at the end of the line in Class 7, and so won’t be getting anything.

I was curious as to what would have happened if my friend had left more than enough money to pay his creditors. If you die without a will in Illinois, after the debts are paid, half of any remaining money would go to the surviving spouse and half to surviving children. That’s on top of the $20,000 for his widow, and $10,000 for each minor child.

If there is a surviving spouse but no children, the spouse would get all the remaining money, after all the creditors are satisfied. If there are children but no surviving spouse, the children would get the remaining money. And if there were neither a spouse nor children, then other relatives would be entitled to the remainder of the estate.

Want to make things easier on your family and friends? Write a will—and try not to die with debt.

Larry Sayler is the only person with a Wharton MBA who also graduated from Ringling Bros. and Barnum & Bailey’s Clown College. Earlier in his career, he served as CFO for three manufacturing and service organizations. For 16 years before his retirement, Larry taught accounting at a small Christian college in the Midwest. His brother Kenyon also writes for HumbleDollar. Check out Larry’s earlier articles.

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6 months ago

Here’s another interesting tidbit related to this subject. This is a scenario where, in the next few years, the widow is likely to be sent a form 1099c by one or more of her late husband’s creditors. A 1099c, for those not familiar, is known as a “cancellation of debt” 1099, and under certain circumstances must be reported on form 1040 as miscellaneous income on Schedule 1.
In this lady’s case, if the debt was entirely in her late husband’s name, she likely will not have to report it on her tax return, and be able to disregard it. However, it would be ideal if she would seek the advice of a tax professional to help guide her through this. I mention this, because these 1099c’s tend to (unexpectedly) show up in the mail, sometimes years after the departed person’s passing, and can cause a considerable amount of stress and worry to the parties involved.
There’s no need to panic (usually), and it can help ease a widow(er)’s distress if there’s someone on hand that can help explain what this obscure IRS form is about.

Larry Sayler
Larry Sayler
6 months ago
Reply to  wtfwjtd

Excellent point. I appreciate you pointing this out. The year a person dies, the spouse is allowed to file a joint return. In this case, he has $60,000+ in “income” in the form of forgiven debt. I think she had better file her 2022 taxes as Married Filing Separately. He (his estate) will owe taxes on this $60,000 in income. In Illinois, the US government is a Class 3 creditor, behind his widow.

6 months ago

I’ve always wondered if it’s possible to live on borrowed money until you die, and then not pay. Apparently, if you are very clever about always making the minimum payment, it is. These banks make huge profits charging high interest rates to those who are still alive, and are willing to take a few losses like this.

R Quinn
R Quinn
6 months ago

I realize the real topic is wills, but I wonder how a person with a $2,500 income can accumulate that much debt.

Larry Sayler
Larry Sayler
6 months ago
Reply to  R Quinn

He kept up on minimum payments. As I noted, he had a 750 credit score. His widow is still receiving credit card offers and personal loan solicitations (in his name). In some ways I feel bad that the creditors will not get what they are legitimately owed. On the other hand, they knowing allowed him to have all of these loans.

6 months ago

Creditors typically can’t go after certain assets like your retirement accounts, living trusts or life insurance benefits to pay off debts. These assets go to the named beneficiaries and aren’t part of the probate process that settles your estate.

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