Debt After Death: Is Your Debt the End of Your Debts?
Death is inevitable, and it will happen to the best of us. But the topic of debt, and what happens after one’s death, is somewhat taboo, and no one wants to talk about it.
However, this is an important topic that must be discussed. People who do not spend time thinking about what will happen when they die, almost always leave their families in a complete mess when they are no more.
The most important thing you can do for your loved ones is to leave a will. A will clearly express your wishes and gives direction on how things shall be done once you are no more. A will also ensure that your family is taken care of in case any issues arise after your demise.
Of primary importance in your will should be your debts. Many families have been left struggling as a result of the debts of a loved one.
In order to avoid this, let us look at what happens to debts after your death.
When you die, your estate must take care of all your debts before settling any other claims, including inheritance. This is usually the case, regardless of whether you have a will or not.
Your ‘estate’ refers to all the properties, money, and goods that you own at the time of your demise.
What Your Family Should do When You Die
When you die, the executor of your will – who is usually a close family member, should notify all of your creditors that you are deceased, and advertise a notice of the estate in the local newspapers for a period of time.
Anyone who has a claim to you, such as a creditor, a beneficiary or anyone who may have been harmed by you, should come forward with claims to the executor.
This automatically starts the clock for the Statute of Limitations. The time is usually a year, except in Washington where the period is 120 days, after which anyone who did not come forward is automatically locked out and out of luck.
Generally, the funeral expenses such as burial, grave maker and occupancy rents for the last six months before your death are paid off first. This is along with any costs that may arise in the administration of the estate.
How does it work?
If you did have a will at the time of your death, all of your debts and assets will be handled during probate. This is a public court that is tasked with supervising the distribution of your assets and payment of your creditors.
The first thing the court will do is to choose an executor if you hadn’t chosen one, and the next course of business is to pay all of your debts, before distributing your assets amongst your beneficiaries.
You can, however, skip the probate, if, for instance, you have a mortgage loan, and it has joint ownership with either a relative or your spouse. In this case, the home and the debt will go directly to the other owner.
Different states have different rules when it comes to dealing with the estate of a deceased person. There are nine community property states, which will treat your marital assets differently compared to the other states.
The community states are California, Arizona, Idaho, Nevada, Louisiana, Texas, New Mexico, Wisconsin, and Washington.
For example, in Washington, a married couple that entered into an agreement to convert everything they own into joint ownership, will automatically leave this property to the surviving spouse.
The surviving spouse can then walk into the bank and execute an agreement with the bank concerning their property, but they must carry the death certificate with them. This will happen even if the account was solely in the name of the deceased spouse only.
Without an agreement, however, all of the property or properties you owned shall be assumed to be jointly owned, and if one spouse dies, half will go through probate, and here, debts are settled first before any distribution of assets can begin.
The surviving spouse shall only be left with their half of the property, while the other half is divided up according to the deceased’s instructions.
Okay, let’s now get down to the nitty-gritty:
Your Unsecured Debts:
If you have credit card debt, a personal loan, or a bank overdraft, these are called unsecured debts, and creditors do not have a right to repossess any particular item of property that you shall leave. They solely depend on the estate to settle their debts.
They are entitled to pursue your estate for the unpaid debts upon your death, but repayment of these debts must wait until other priority debts have been settled first. Your family doesn’t have to cover them as well unless the account has joint names as account holders.
Loans with credit unions are easier to deal with, as the credit union shall typically clear them using your savings, or their insurance scheme.
Running into debt isn’t so bad, it’s running into creditors that hurts. – Unknown
With credit card debts, liability is usually with the joint holder. If there wasn’t any joint holder, then the rules outlined in the point above shall be effected, which means that the debt shall only be settled once other priority debts have been settled already.
If the deceased was the sole account holder, then the credit card company shall have no recourse, and they cannot go after their assets for settlement of the debts. This is true even if the card had other authorized users. These users are not held liable for the credit card debt.
The exception to this rule is with spouses who live in the property states. In this case, the spouse may or may not be liable to the credit card debt when the other spouse dies, depending on whether or not they had an agreement prior to death.
Your Secured Debts:
These are loans that require a specific form of security to be put up before the lender can issue out the loan.
The executor of your will can pay off your car loan from the estate. If the payments stop and the debt is still not cleared, then the lender has every right to repossess the car.
Also, in case the estate is unable to pay off the loan, then the person who inherits the car shall be required to continue making payments for the car, failure to which it can be repossessed.
The reason behind this is that; a car loan is a secured loan, which means that the owner had to put up all the documentation pertaining to the car as collateral with the lender, which means that; if they are unable to pay the loan, the lender can sell the car to recover their money.
Mortgage rules vary depending on the lender, but in general, the debt passes on to your spouse or the beneficiary.
The joint mortgage holder, however, cannot be forced by the lender to sell the house upon your demise.
This is a secured loan, and the lender can take action if the loan remains unpaid for a specific period of time.
Your Student Loans:
The estate can pay off private student loan debts, but in this case, the lenders do not have a recourse if the estate cannot repay the unsecured obligations, of which student loans are one of them.
If the loan has a co-signer however, they will be responsible for paying off the remaining debt, and in the community property states, the spouse shall be held liable, if the student loan was incurred during their marriage.
Some lenders do tend to forgive student loans upon death such as Wells Fargo and Sallie Mae.
Federal Student loans, on the other hand, are discharged upon death, and in the case of a Student’s Parent PLUS loan, it shall be discharged upon the death of the student or the parent who took out the loan.
When a debt collector calls:
According to the rules of the Federal Trade Commission, a debt collector can contact the deceased person’s parents, spouse, guardian, and executor to discuss how the debt shall be cleared.
The debt collector, however, should not mislead the family members that they are responsible for the debt, because they are not.
They have rights, which they can exercise at any time, and instruct the debt collectors to cease and desist from calling them or sending them any letters concerning the debt.
Here’s what creditors cannot take:
Creditors are typically not allowed to go after your life insurance benefits and your retirement accounts. These go directly to the named beneficiaries, and they are never part of the probate process, that seeks to settle your estate.
Life insurance payouts are protected by the law, and the law seeks to ensure that family members you rely on you will receive something after you pass on. In addition, these payouts are not taxable.
It is, however, important to note that you must have named beneficiaries on your insurance, otherwise, if there aren’t any beneficiaries, it is counted as part of your estate and will go through probate and most likely to the creditors.
The topic of death is always uneasy, and most people do not want to talk about it, but the truth is that there are many people out there who have been left in a terrible mess after their sole breadwinner dies, simply because they did not know what happens after death, and therefore, it is important to talk about these things.
Make use of financial planners, accountants, and lawyers to help you plan for your estate, and ensure that every single thing you own is well taken care of. There’s nothing wrong about planning and talking about your own death.
Write a will, and specify how you want everything to be handled, and most especially how you want your estate to be distributed.
Always plan ahead. As the head of the household, and to help protect your loved ones from being liable to your outstanding debts after your death.
You should provide clear and concise instructions on how the debts shall be held after your death, and also ensure that there are sufficient funds to cover these debts.