Experiencing the death of a loved one is traumatic enough, but worrying about what will happen to their debt adds more heartache to the situation. Depending on the preparations your family member has made in advance, surviving heirs may have to face this additional layer of mourning.
A family member’s unpaid debts are usually paid out of their estate before their will is settled. In some cases, heirs can be held liable if the remaining assets are insufficient to repay the debt.
A study by the National Bureau of Economic Research found that 46.1% of American seniors with assets less than $ 10,000 die. And it is possible that outstanding debt will exceed that amount. Here is everything you need to know about what happens to debt after your family member dies.
My family member left an unpaid debt, what now?
Don’t worry about suddenly becoming legally responsible for the debts of your deceased parent, grandparent, or sibling. Even if you die with unpaid debt, that debt does not legally pass on to you.
However, if your spouse dies, you may be on the hook because of their debt. Most of the time you won’t be, but this varies by state.
You are responsible for a deceased person’s debts if you were a co-signer to a loan or mortgage for a deceased family member. The same is true if you are the joint account holder of a credit card. And in some states, the estate has to pay any outstanding bills if you own property with someone who has died.
Remember, if you live in a jointly owned state, you may be liable for your spouse’s debts. There are nine community-owned states:
- New Mexico
In these states, the spouses share the debt. Creditors may be able to use community property to pay off debts. However, the details vary by state. So, contact an attorney near you to understand your rights.
If you co-signed medical bills for a loved one when you entered the hospital, you could face costs that are not covered by insurance. This also varies depending on the federal state.
Contact from debt collection agencies
Even if it might feel traumatic, debt collection agencies are allowed to contact you if your spouse has died and left a debt. However, you must not claim that you are responsible for the debt unless you were a joint account holder or co-signer. Otherwise, they are only authorized to contact you for information about the administrator of the estate so that they can try to reclaim the payment.
Since the deceased’s estate remains responsible for the debt, a debt collector could file a lawsuit against the estate. However, unless you fit into the particular circumstances listed above, they cannot claim that you are legally responsible for the debt. This also applies if you are the executor of the estate.
How to deal with inherited debt
If you are legally required to pay the debt left behind by a deceased family member, you must take steps to repay it. Failure to pay debts, such as B. A co-signed mortgage loan or credit card that you are the joint account holder of could adversely affect your balance. This includes affecting your ability to obtain funding in the future. In some cases, creditors can go so far as to garnish your wages.
What happens to a mortgage when a spouse dies?
Family members who inherit a property are allowed to take over the mortgage from a deceased loved one. Federal law excludes heirs from having to show that they can actually repay the funds before taking on the mortgage.
While this gives you some flexibility in determining how the mortgage payments should be made, it can also be stressful if you really can’t afford the rest of the mortgage. You can always ask the lender about any changes you can make to the mortgage so the payments are within your budget.
If you decide that you do not want to pay the remaining funds on the mortgage, you can sell the house or allow the lender to foreclose it.
Preventing Unauthorized Debt
The executor of your loved one’s estate should notify all lenders of your loved one’s death so that they can settle the bills. These lenders then report your loved ones to the credit bureaus as deceased. This can prevent scammers from trying to incur additional debt on your family member’s behalf.
Typically, the funeral home will also notify the Social Security Agency (SSA) of the death of your loved ones if you give them their social security number. You can also do this yourself by phone or in person at an SSA office.
Face secured loans
There is a chance that you may face a creditor towards items that have been used to secure credit. For example, let’s say you owned a car with your spouse, and the car loan is in your spouse’s name. If your spouse dies and their estate cannot repay the loan, you may be battling a creditor trying to repossess your car.
For this reason, contact secured loan lenders immediately to notify them of a death and set up a payment plan.
Paying off common debts
If you were previously a co-signatory or joint account holder, you can be legally responsible for debts you cannot afford. In this case, one option is to look into refinancing the debt in order to potentially get a lower interest rate or a longer term.
If you’re having trouble or feeling overwhelmed processing new invoices, consider seeking professional financial advice. Often times, you can get free or low-cost loan help from nonprofit organizations or credit unions. In doing so, make sure that anyone you are receiving advice from is accredited by the National Foundation for Credit Counseling or the Financial Counseling Association of America.
How to protect your family from inheriting debt
People commonly take steps to prevent their debts from being passed on after death by purchasing life insurance that provides such coverage. There are different versions of life insurance policies that could help your heirs pay off your remaining debts. Remember, always compare life insurance companies online to ensure you are getting the best deal for your circumstances.
Credit life insurance
Typically, you will be offered credit life insurance when you get your mortgage or other major loan such as a car loan. If you take out credit life insurance, your loan will be repaid based on your policy after your death.
As your loan matures and the outstanding amount decreases, the policy’s death benefit also decreases. Because credit life insurance is a guaranteed expense, health screening is usually not required. Note that the credit life insurance is paid directly to your creditor rather than your heirs.
Term life insurance
The death benefit from term life insurance can also be used to repay a debt. If you have a large source of debt, such as For example, a mortgage, you can take out term life insurance that covers the entire term of your loan. You can also choose to cover debts for which you have a co-signer with life insurance.
For example, let’s say you have a $ 1,000,000 mortgage. So you want a death benefit that covers these costs. Term life insurance only pays the death benefit if you die within the term of the policy. If your mortgage has a 30 year term, you will likely want a term that covers the same period.
Your monthly premiums are based on the length of your term, death benefit, age and possibly other factors such as your health. The annual premium for a life of $ 1,000,000 can range from $ 514 (for a 20 year old woman) to $ 1,894 (for a 40 year old man) for a term of 30 years.
Make sure you designate a specific beneficiary so that life insurance doesn’t go straight into your assets where creditors might have access to.
Although life insurance is typically more expensive, it will build cash value throughout your life that you can withdraw to repay debts while you are still alive. Your heirs can also use the death benefit to pay off debts such as mortgages or car loans.
Life insurance premiums also vary based on the age at which you took out your insurance, gender, age and the amount insured. Health can also affect your premiums. For example, a smoker can make your life insurance more expensive.
All of life can be considerably more expensive. For example, a 40 year old woman could get $ 80 per month for 20 year life insurance with a term of $ 1,000,000 and over $ 1,000 per month for life insurance over $ 1,000,000 per month.
The bottom line
While there are many scenarios where you will not be liable for the debts of a deceased loved one, there are enough ways you can cause a significant financial crisis if you are not prepared.
One of the best ways to prepare is to make sure that your loved one has adequate life insurance to cover their debts and that you are identified as the beneficiary. This can be especially important if you are the co-signer of a loan or if you are concerned about paying the mortgage on a home that you share with your family member.