Payment of Debts
The next part of your will, Article II, directs that all of your debts, obligations, and taxes be paid. Any person or entity to which you owed money when you died is called a creditor. You've learned that when you die, one of the first jobs of the executor is to hire a lawyer to file the necessary papers with the probate court. The lawyer will also tell the executor what she needs to do to administer your estate. One of the jobs of your executor is to pay the debts and obligations you owed when you died.
If your executor does not pay the creditors, an unpaid creditor is allowed to file a claim against your estate demanding payment. If there are not enough assets to pay all of your debts and obligations, there is a process to determine which debts will be paid in full, which debts will be either partially paid or not paid, and in which order.
There are certain types of debts that are secured. When a debt is secured by property you own while you are living, that piece of property can be sold to pay the debt. The best example of this type of secured debt is the debt you owe on your home.
When you borrowed money to buy your home, you signed two types of legal papers. The first was a promissory note. The promissory note made you and whoever else signed the promissory note personally liable for the debt. The second type of paper you signed gave the lender, typically your bank, a security interest in your house known as a mortgage. If you don't make your payments, the lender has two choices. The lender can sue you and whoever else signed on the promissory note, or the lender can take the house back and sell your home under the terms of the mortgage.
Lenders Have Rights When You Die
When you die, if you owed money on a promissory note, secured by a mortgage on your home, the lender typically has the right to demand that the debt be paid in full. Anytime you own property secured by a mortgage, that property can be sold to pay the debt. Lenders typically don't exercise this right as long as someone continues to make the monthly payments.
Article II of your will may include a passage such as the following:
If any property owned by me jointly, or individually, passing under this will or otherwise, shall be encumbered by a mortgage, pledge, security interest, loan, lien, or unpaid taxes, the indebtedness secured by such encumbrance shall not be charged to or paid by my estate but such property shall pass subject to all encumbrances existing at my death.
This language is merely telling your executor that if there is a secured loan against a particular piece of property you owned, the executor is to distribute that property without paying off the loan against the property.
Please understand that these instructions are not binding on the lender. The lender will have the right to be paid in full before the property is distributed to your heirs, if the lender chooses to exercise its rights under the loan documents. A lender may choose to exercise its right to demand that the property be sold if your estate has more debts than it has assets, and the lender is not comfortable that the other person who signed the note, if there is one, is capable of making the payments.