When it comes to estate planning, most people think about what will happen to their assets when they pass away. What many people tend to forget about is what happens to their debt when they die. Just like your money, you can’t take your debt with you when you die (at least in most cases). Unfortunately, your survivors may have the burden of dealing with creditors and lenders who want to collect their money after your death. Here we take a look at what happens to your debt when you die and how your accounts should be handled to avoid additional financial burdens.
Can you inherit credit card debt?
There are several factors that determine what happens to your credit card debt after your passing. The main factors to consider are the state in which you live and person who applied for the account. In most cases credit card debt is paid for through the estate of the decedent. This means if you have credit card debt at the time of your death, assets held in your estate will be used to pay off the debt. If there is not enough money in the estate to cover credit card bills, the credit card company will end up taking the hit and writing off the unpaid debt.
There are two situations where your debt can be passed onto another person. If the credit card account was a joint account that was shared with another person such as a spouse or business partner, that person would be legally responsible for paying off the debt instead of your estate. This applies to anyone who signed the application, but does not applied to authorized credit card users who had charging privileges but did not apply for the credit originally. The second situation occurs in states that employ community property laws. They include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Depending on the laws in each state, the surviving spouse may be responsible for the credit card debt of their deceased partner even if they held a separate account.
What happens to other debts?
Similar to credit card debt, most other debts held in the decedents name only will be paid from assets in their estate. In the case of secured debt, if the assets do not cover the debt, the property may be sold or repossessed to cover the debt. In the case of accounts held jointly with another person, the surviving account holder will be responsible for any remaining debt.
The most common example of this is a mortgage. If there is someone else’s name on the mortgage loan (like a spouse), then they are going to be responsible for the mortgage debt, just like they were before you passed away.
Another common example of family members getting your debts is student loans. For most student loans, there are co-signers (could be a parent or spouse). If you were to pass away and you were still responsible for student loans, those debts are going straight to whoever the co-signer is. If they don’t pay those loans, then collectors are going to track them down.
Debts Before Marriage
Marriage can be a tricky business, especially when it comes to debts. There are a lot of different factors which decide if your spouse is going to be responsible for your bills if you were to pass away.
One of the biggest factors is the state you live in. In most cases, your spouse will not be responsible for any debts you racked up before you got married. Unless they co-signed your loan, they are off the hook for your bills and expenses.
Although, if you live in a community property state, then it’s going to change everything. These states operate a little differently in terms of debt. The best explanation of this is from the legal website NOLO.
“ In community property states, most debts incurred by either spouse during the marriage are owed by the “community” (the couple), even if only one spouse signed the paperwork for a debt. The key here is during the marriage. So if you incur a debt, such as a student loan, while you’re single, and then get married, it won’t automatically become a joint debt. (An exception is where a spouse signs on to an account as a joint account holder after getting married.) Some states, like Texas, have a more nuanced way of analyzing who owes what debts by evaluating who incurred the debt, for what purpose, and when.”
So, if you happen to live in one of these states, then you’re responsible for the debts your spouse takes on during the marriage. If the debts come before the marriage, or after, then the spouse isn’t responsible.
How should accounts be handled after a death?
After a death it is important that all creditors are notified of the account holders passing. Without being notified, they have no way of knowing about a death and will continue to pile on fees and penalties for payments not made on time. This can increase the amount of debt that will eventually be paid out of the estate, reducing the inheritance of beneficiaries. In most cases the person handling the estate will be responsible for notifying creditors and providing copies of the death certificate. You also want to protect yourself from unscrupulous creditors who may try to get money from you which they are not legally entitled to.
This is one area where using an estate lawyer to prepare a will may be beneficial to ensure the estate is handled properly. The last thing you want to happen is to have the entire estate held up in probate or in court while a judge tries to determine how to settle the estate.
This is why life insurance is so important
Life insurance is there to protect you and your loved one. When deciding how much life insurance to buy, you should not only consider lost income, but how much money is needed to settle all outstanding debts.
Sure, nobody wants to think about their death, but not having preparations in place will leave your loved ones with some of these debts. If you didn’t have life insurance, your loved ones could be facing some massive bills if something were to happen to you.