What happens to your debt when you die?

Knowing what happens to your debt when you die is probably not going to be a dinner table conversation tonight.

After all, death and money are taboo subjects on their own, let alone together. This is according to a UK-based study which concludes that the absence of an honest discussion about the death of a breadwinner directly leads to financial problems after their departure.

This is exactly why knowing what happens to your financial debt when you die is such an important discussion to have with a spouse or family members. The thing is, there are a lot of financial debts that, if left unpaid, will have to be paid by someone else when you die.

Don’t let this happen to your loved ones. It’s time to get acquainted with the debts that will outlive you – and that could leave your spouse and family footing the bill while you’re away in the afterlife.

Who manages your debts when you die?

For starters, debt laws after death can vary from state to state, so it’s worth checking with your secretary of state’s office to find out exactly what happens to your estate after death. your death. A good estate planning lawyer can also help you with this.

Beyond that, the succession process after death is fairly uniform across the United States. The process generally goes as follows:

  • After death, the deceased’s executor will begin the process of reviewing the deceased’s assets and debts and reviewing all outstanding bills. The executor also obtains and reviews a copy of the deceased person’s credit report to see what debts are outstanding.
  • The executor then contacts the US Social Security Administration, as well as any creditor or lender (such as a mortgage company or auto finance company) and issues a death certificate in the name of the deceased.
  • At this point, all debts of the deceased are passed on to his estate. The executor will receive and then record all outstanding debts that the deceased owes and which will be legally managed and paid by the estate.
  • Debts are legally prioritized, which means certain creditors, such as those issuing medical bills or mortgages, come first. A probate court will act as arbiter on the remaining debts first, in the absence of clear instructions from the deceased person’s will.

Some assets are kept outside the deceased’s estate and cannot be touched, in most cases, unless a designated beneficiary has been named to receive those assets. Generally, life insurance, retirement and annuity accounts and brokerage accounts (and all assets included) are left outside the estate and cannot be used to pay off debts.

What happens to your debts?

In many cases, the debt left behind is small or moderate, and can be repaid with the assets of a common bank or money market account. Even cash left in a safe deposit box is considered a “liquid asset” and can be used to pay off remaining debts.

When this happens, the spouse or executor will review the bills, access the necessary liquid assets/accounts and pay the bills.

If the executor does not have enough cash to pay the outstanding debts, the creditor has other remedies to recover their money.

  • If the outstanding debt relates to a co-signed loan, the co-signer is liable for the debt.
  • A spouse could be responsible for the debt if they hold a joint account with the deceased.
  • If the spouse lives in a so-called community state, including: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin, then the spouse may be responsible for the debt.

What happens to specific debts?

Not all private debts are treated the same after the death of the person who owes the debts. Here’s how some major consumer debt is handled:

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Mortgage debt

The rules vary on mortgage debt after the death of the mortgage holder. Typically, the mortgage passes to a spouse or partner whose name is also on the mortgage. This co-mortgage holder cannot be forced to sell the house immediately after the death of the co-mortgage holder. If there is no joint mortgage holder, the mortgage can be paid by the estate of the deceased. If there aren’t enough funds to pay the mortgage, whoever inherits the home can move in and take over the mortgage payments.

Home Equity Loans

Unlike home mortgages, creditors can demand that whoever inherits the home (and loan) after the owner dies to immediately repay a home equity loan. However, the lender does not have to. In many cases, the home equity lender will agree to the heir paying off the loan.

Credit card

With a credit card, any joint account holder is responsible for payments and debts after the joint account holder dies. If there is no credit card account holder, things get complicated, especially for the credit card company. In the event that the deceased is the sole account holder, the credit card company has no recourse and cannot pursue unpaid debts, even if the card has authorized users (who are not held liable for debts credit card.) The exception is for spouses who live in community property states, who may or may not be responsible for unpaid credit debt when a spouse dies. It is best to consult a lawyer to find out if you are liable for these debts.

Car loans

Car loans are similar to mortgages in that the estate can handle the payments if the money is available. Otherwise, whoever inherits the vehicle has the option of continuing to make payments or selling the vehicle to cover the cost of the auto loan.

Student loans

The executor can use estate funds to pay off student loan debt. If funds are not available, student loan providers cannot force the estate to repay the loans because student loans are unsecured. This scenario changes if there is a co-signer for the loan. In this case, he is responsible for repaying the debt. Spouses in community states may be responsible for student loans taken out during marriage. It is best to consult a lawyer to find out if you are liable for these debts.

Plan ahead to protect your loved ones from unpaid debts

With wise financial planning, any head of household or breadwinner can protect their loved ones from liability for unpaid debts after death.

For example, the breadwinner can provide clear and concise instructions on how to manage their debt after death and can ensure that there are sufficient funds available to cover these debts. Typically, these funds can come from general savings, retirement savings, investment accounts, or an insurance policy.

An effective insurance policy that can help cover unpaid debts after the death of the policyholder is a term life insurance policy.

Term policies provide a death benefit to the policyholder for a specified period (i.e. five years or 10 years, for example). Money held in the policy can be used by the estate to pay off outstanding debts of the deceased.

A head of household or breadwinner can also make things easier for their family by designating beneficiaries on key accounts like insurance, retirement, and investment accounts. With a beneficiary in place, it is much easier to preserve family assets when a breadwinner dies.

Having a will in place can also make things easier for the family of the deceased when it comes to unpaid debts. A will can dictate the recipients of the deceased’s estate and specify where existing financial accounts reside and how to access them, making paying off any outstanding debts easier and more efficient.

Don’t leave your loved ones in debt

Yes, the subject of death and what happens next with debts is a difficult topic to talk about.

But it is a discussion that needs to take place in order to ensure that your debts are covered after you leave and that your loved ones are taken care of financially.

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