Perhaps you’ve
wondered about what happens to your own debt (or your parent’s debt) when you
(or they) die? Short answer[1]: it does not disappear; the
debt must either be paid out of the deceased’s estate or by a co-creditor. What
exactly happens to this debt can vary and how you handle your debt can greatly
impact the people you love.
When an individual dies, someone will handle
his or her affairs, and this person is known as an executor or personal
representative. The executor can either be someone of the individual’s choice,
if he or she planned in advance, or someone appointed by the court in the
absence of planning. The executor opens the probate process, during which the
court recognizes any will that is in place and formally appoints the executor
to administer the deceased’s estate and distribute any outstanding assets to
their loved ones.
How Debts Are Handled After Death
During probate, the estate’s assets are used
to pay any outstanding debt. This usually includes all of an individual’s
assets, although it does not include assets with beneficiary designations, such
as 401(k) plans and insurance policies.
The estate does not own these assets, and they pass directly to the
named beneficiaries. Given these factors, if an individual’s assets are subject
to probate and the person has outstanding debt, their beneficiaries will
receive a smaller share of anything left to them in the estate plan.
In most cases, the estate first repays any
outstanding secured debts, including car and mortgage loans. Following this,
the estate repays the legal and administrative fees associated with executing
the deceased’s will.
Typically,
unsecured debts, such as credit card debts, are the last form of debt the
estate repays. Usually, if the estate lacks the assets to repay these debts,
creditors have no choice but to accept the loss.
However, in some states, probate laws may
dictate how the deceased’s creditors can clear these debts in other ways, such
as by forcing the sale of the deceased’s property. It’s worth noting that there
is a time limit for creditors to claim against an estate after the deceased
dies, and this time frame varies between states.
Avoiding Probate
There are several things you can do to avoid
probate. Perhaps the most common involves establishing a revocable living
trust. Since the trust, not the estate, owns the assets, assets held by a
properly funded and maintained trust do not have to go through the probate
process. While creating a living trust does not guarantee an individual’s
assets will receive protection from creditors if that person has debt, it does
allow your trustee to negotiate with creditors more easily to reduce any
outstanding debt. In theory, creditors may still sue to repay the debt in full.
However, since this could involve significant costs, creditors may prefer to
settle instead.
When Do Surviving Family Members
Pay The Deceased’s Debts?
Most of the time, it is unnecessary for
surviving family members to pay the deceased’s debt with their own money.
Instead, as noted above, payment of the debts are either paid out of the
deceased’s estate, or if there is no estate, the debts are extinguished.
However, there are some exceptions to this, including the following:
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Co-signing loans or credit cards: If someone
cosigns a loan or credit card with the deceased, that individual is responsible
for clearing any outstanding debt associated with that account.
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Having jointly owned property: If an
individual has jointly owned property or bank accounts with the deceased, that
person is responsible for clearing any outstanding balances associated with
these assets.
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Community property: In some states, including
California, Arizona, Nevada, Louisiana, Idaho, Texas, Washington, New Mexico,
and Wisconsin, the surviving spouse is required to clear any outstanding debt
associated with community property. Community property is any property jointly
owned by a married couple.
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State laws: Some states require surviving
family members, or the estate more generally, to clear any debts associated
with the deceased’s healthcare costs. Additionally, if the estate’s executor
failed to follow a state’s probate laws, it might be necessary for him or her
to pay fines for doing so.
What To Do When Someone Dies With
Debt
When someone dies with outstanding debt, it
is important to take swift action to
handle their affairs and negotiate their debts. Below are some steps to follow
when faced with this scenario:
01 - Understand Your Rights
Since probate laws vary between states, it’s a
good idea to thoroughly research the probate process in your state, or hire a
lawyer to handle the estate for or with you. Many states require creditors to
make claims within a specific period, while also requiring surviving family
members to publicly declare the deceased’s death before creditors can collect
any outstanding debt. It is also against the law for creditors to use offensive
or unfair tactics to collect outstanding credit debt from surviving family
members. Definitely ask creditors for proof of any outstanding debt before
paying.
02 - Collect Documents
Collecting documents can be fairly
straightforward, particularly if the deceased left all their vital financial
papers in a single location. If the surviving family members cannot locate
these documents, they can request the deceased’s credit report, which lists any
accounts in the deceased’s name.
03 - Cease Additional Spending
This is essential to prevent any debts in the
deceased’s name from increasing further, even if there is another person
authorized to make payments. Ceasing additional spending, including canceling
any recurring subscriptions, also helps prevent unnecessary complications when
negotiating with creditors.
04 - Inform Creditors
Proactively contact the deceased’s creditors
to look into options for negotiating the debt, and notify credit bureaus of the
death. To complete this process, it’s useful to have several copies of the
death certificate to share with insurance companies and creditors. Afterwards,
ask to close all accounts in the deceased’s name, and request the credit bureaus
freeze the deceased’s credit, preventing others from unlawfully getting credit
in his or her name.
05 - Close The Estate
Once all debt has been paid off, forgiven, or
extinguished, the executor can officially close the estate. The process for
doing this varies based on how assets and debts were held, so do not handle
this part alone. Contact us to find out how we can support you.
We Can Help Ensure Your Family
Doesn’t Get Stuck With Your Debt
Effective estate planning involves taking care
of your affairs, and this includes ensuring your debts will be handled in such
a way that your family isn’t left with a big mess or inadvertently forced into
court. Consider scheduling a Family
Wealth Planning Session with us to determine how we can help protect your
assets and prevent creditors from reducing the gifts you want to leave your
loved ones after death. Contact us today to learn more.
This article is a service of Ganvir Law, Personal Family
Lawyer®. We do not just draft documents; we ensure you make informed and
empowered decisions about life and death, for yourself and the people you love.
That's why we offer a Family Wealth Planning Session™, during which you will
get more financially organized than you’ve ever been before and make all the
best choices for the people you love. You can begin by calling our office today
to schedule a Family Wealth Planning Session and mention this article.