What Will Happen to Your Debts After You Die?
Have you ever wondered how the deceased outstanding debts are settled? Are they transferred to others, settled as debt purgatory or are they merely forgotten? All these options are possible depending on several circumstances like where you stay and the kind of debt.
Millions of Americans get buried in debts, literally. A recent survey by CreditCards.com conducted on 1,114 adult’s shows that 65% of American millennials are living in liabilities, while 83% of the retirees are unsure if they will clear their dues.
The survey further revealed that 73% of the people who died between October and December 2016 left an average of $61,554 outstanding debt. Usually, these debts result in unpaid mortgages, student loans, car loans, and credit cards as well. The only good news is that the survivors do not always get stuck with the outstanding dues.
How Are The Deceased Debts Paid?
When a person dies and leaves a debt, the estate of the deceased is held responsible for the repayment of the debts. Commonly, an executor, administrator or personal representative from the estate finance is chosen to handle the case, which they pay using the estate’s money and not their cash.
Apart from the legal representatives, no one else can be held responsible for the deceased debt repayment. However, one can exempt the rule in the following cases:
- If the dead had a co-signer on loan, then the co-signer pays.
- If the debt was borrowed using a joint account- then the rest of the joint account holders owes the debt. However, there’s a difference between a joint account holder and the authorized user. An authorized user is not held responsible for the owed loan amount.
- If the state law requires the spouse to contribute with a certain amount of the debt.
- If the state law requires the legal representative to pay the outstanding loan dues by selling the deceased property, which was jointly owned by the dead and the surviving spouse.
- If the community property states that the surviving spouse might sell the community property to pay the outstanding debts of the spouse. These community states include California, Louisiana, New Mexico, Arizona, Nevada, Washington, and Texas.
- If there is no joint account or co-signer, the estate of the deceased is the only one who owes the debt.
Which Debts Will be Paid Off First?
- Secured debts are paid first – these include the debts against the deceased assets/ for instance, a car loan against a car or a mortgage against a house.
- Administrative costs are paid afterwards – these include the funeral costs as well the administration of managing the estate
- Unsecured debts are paid at the end – all debts which are paid in installments such as student loans and personal loans. They also include utility bills, Council Tax, credit cards, and unpaid rent.
How Different Debts are Dealt with?
- Mortgage – if the home does not have joint owners, the administrator uses the estate’s income to pay. If the esteem money is not enough, the person who inherits the house pays.
- Credit cards – in case the estate lacks enough assets to pay for the credit card balances, then the credit card companies become are held responsible. However, a joint account holder can settle the unpaid bills.
- Car loans and student loans – the executor pays for the outstanding car loans. If the estate payments stop, the lender may repose the car. For the student loans, the administrator pays off the outstanding private loan for the deceased. The loan co-signers can also be held responsible for the repayment.
Outstanding Debt Collection
The Federal Trade Commission allows the debt collectors to contact the deceased parents or spouse if the dead was a guardian, minor or administrator. However, the creditors can’t take your life insurance or retirement accounts benefits.
The mentioned beneficiaries enjoy those benefits and thus are not part of the probate process. Since life insurance policies are protected from the creditors, the procedures can be used to protect the surviving family members who would be responsible for the debts. Usually, the life insurance payouts are not taxable.
Dealing with the demise of a dear one is devastating. The situation might even become worse when you are left with debts to sort out; it might affect you emotionally, toll your wellbeing and also change your finances. However, you can lessen the burden by following the above tips then choosing the right team of advisors to recommend the best debt solutions.