Who Will Pay Your Debt When You Die?

This is a question most of us do not want to spend much time thinking about because by the time it becomes an issue, we are not around to deal with it. Debts do not disappear after a person dies. The bills become the executor of the estate’s responsibility, so it is important to understand the financial and legal consequences of your or a loved one’s death.

Losing someone you are close to is stressful enough, so the added pressure of handling their financial affairs can be overwhelming and take an emotional toll. We are never fully prepared to lose a loved one, so it is essential to educate yourself on the basics.

• Estate:

  Consists of all of the property a person leaves behind when he or she passes away.

• Executor:

  An individual appointed as administrator of the estate of a deceased person. The executor’s main duty is to carry out the instructions and wishes of the deceased.

• Will:

  Also known as a Last Will and Testament, is a legally enforceable declaration of how a person wants his or her property or assets to be distributed after death.

• Heir:

  A person legally entitled to the property or rank of another upon that person’s death.

• Community Property State:

  money earned by either spouse during the marriage and all property bought with those earnings are considered community property equally owned by husband and wife. Likewise, debts incurred during marriage are generally debts of the couple. Hawaii is not a community property state.

When someone passes away with debt, it becomes part of the estate. The executor of the estate will handle the debt in accordance with federal and state laws. The executor is required to pay off all the debts if there is ample cash to do so. Any leftover money will go to the heirs. The debt will only go unpaid if there are insufficient funds to pay off the debts in the estate. According to the Federal Trade Commission, family members are not usually obligated to pay the debts of a deceased relative from their own assets.

Auto Loans

An article in Nerd Wallet explained if an auto loan is not paid off, the lender has the right to repossess the car. However, the person who inherits the vehicle can continue making payments and the lender is unlikely to take action.

Home Loans

Federal law prohibits a bank from automatically foreclosing when a homeowner dies. Protections are in place to allow family or those living in the house to keep it as long as they continue mortgage payments. It is always best to contact the mortgage lender to discuss best options.

Credit Cards

If the credit card is in the deceased name only, it is the executor’s obligation to pay the debt. If there is a joint owner or a co-signer on the account, the other party is most likely responsible for payment. Community property states become more complicated, so check with an attorney who knows your state laws.

Student Loans

Federal student loans are forgiven when the borrower dies, which means nobody else is responsible to pay them off.

If the student loan was provided by a private lender the executor will need to contact that lender to see what the requirements are.

If someone co-signed for a loan or line of credit issued to the deceased person, the cosigner will be liable for the debt if the assets of the deceased person do not cover it.

And let’s not forget a quote from Benjamin Franklin in a letter to Jean-Baptiste Leroy in 1789: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” The government still wants their share!

Want a little more help?  Check out our eLearning module on Estate Planning and our estate planning blog as well.