Most of us will die with some debt. What happens to that debt when we pass away? It’s not an easy question to answer. But planning how your outstanding debt is handled after your death will prepare your family.
It’s common for a couple to co-sign for a mortgage or for a parent to co-sign for a car. If the deceased had a joint account with another, then the survivor is responsible for the debt. With credit cards, it’s important to note that if the survivor is only an “authorized user,” he or she is not responsible for the debt. An authorized user on a credit card account should stop to using the card after the cardholder dies because this could be considered fraud.
Community Property States
In community property states, married couples own all property and owe all debts equally. Most states are not community property states, but for those that are, the surviving spouse can be held responsible for his or her partner’s the debts after death. Only debts that occurred during the marriage are considered the responsibility of the surviving spouse, even if the surviving spouse didn’t co-sign or guarantee them.
A legal process called probate is necessary to transfer ownership of the deceased’s assets to heirs or beneficiaries. The probate process also pays the debt. Debts are paid before the remaining assets are transferred to heirs and beneficiaries. One of the first steps of the probate process is notification to the deceased’s creditors that they must make an official claim for payment. Failure to respond means they don’t get paid. If the estate doesn’t go through probate, and if no one else co-signed or guaranteed a debt, creditors may not receive payment. Once all the debts are satisfied, the family will inherit any left over money.
Sometimes Debts Can’t Be Paid
Sometimes there are more debts than assets. When this occurs, the estate is insolvent. The executor of the estate (the person who manages the probate process) must sell off or liquidate assets to raise cash to pay the deceased’s creditors as much as possible. Certain debts may receive payment first, depending on state law. In most states, some assets, such as retirement account funds, are safe from liquidation to pay creditors. If there’s no money left in the estate, creditors don’t get paid.
The executor of the estate should notify creditors as soon as possible of the death. The largest three credit reporting agencies – Experian, Equifax and TransUnion – should be notified as well. It’s a good idea to request the account be flagged with the statement “Deceased: Do not issue credit.” This will help prevent identity theft, which is becoming a common problem.
Creditors may ask you to pay a debt even if your name is not on the account, but you are not legally obliged to pay. Send the creditor a copy of the death certificate. Notify the executor or trustee, if it is another person. The estate or trust may have to pay that debt, but you personally are not liable if your name is not on the debt.
The death of a loved one raises additional complications for those coping with grief and loss. Whether it’s a mortgage, credit cards, student loans, or medical debt, it’s important to know about the debt and how to handle it.