If a person dies and he has no money and no assets, then the debts are canceled out. The family will not inherit the debt. The deceased family member must have no money in a bank account, stocks, bonds or CDs. He must also not own any property or large items, such as a car that can be sold to pay for the debt.
If There Are No Assets
Community Property States
In some cases, a husband or wife can be held liable for the debts of their spouse. This happens in community property states. Only debts that have occurred during the marriage are held against the spouse. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
If There Are Assets
If the deceased family member had assets, they must be used to pay off any debts before any money is distributed to family members. That means if there is not enough cash to pay off the debt, property must be sold. Mortgages and car payments must be paid off first. After that debts, such as credit card bills and student loans are paid. If there are any other debts, they are paid last. Once all the debts are satisfied, the family will inherit any left over money. If the money runs out paying off the debts, then the family receives nothing.
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If the deceased family member had any accounts with another family member, then that family member is responsible for the whole debt. This happens when a parent or grandparent co-signs for a student or car loan. Say a college age student dies suddenly, then the parent who co-signed the student loan would be responsible to pay off the entire student loan.
If a house or a car is bequeathed to a family member, then the family member has two options. He can either sell the house or car and pay off the loans, or he can take over the house and car and continue making the monthly payments himself. This is only if all other debts are paid, or if there aren't any other debts.