What Happens to Your Debt When You Die?
When your loved ones pass away, there is a lot that is involved. The activities involved include those involved in a death, making funeral arrangements, and the feeling of intense grief. The loved ones are in the process of learning how to live in the absence of the deceased. They would also experience the potential change in income, especially if the deceased were the family’s main breadwinner. The most important thing that many people do not know how to go about is the individual’s debt.
Grief is a challenging process in life, and the last thing that grieving people should deal with is our debt complaints. Should the debt be forgiven or paid, and who is responsible for making the payments if it has to be paid? If the individual’s liabilities are more than the assets, who is responsible, and what should they do? Will the debt collectors come knocking on your door? The process is complex, and that is why you need to know what happens to the debt to avoid inconvenient situations. Here is a guide to what happens to an individual’s debt when they die.
1. Use Personal Assets to Cover Debts
If an individual had financial obligations, the person's death does not mean that the obligations will be forgiven. The first way to settle such obligations is using the individual’s assets. The Consumer Financial Protection Bureau points out that the administrator or representative that had been appointed by the deceased is responsible for settling the obligations. This is inclusive of medical debt that the deceased might have incurred in the hospitals.
When a person dies, their assets should be passed on to the next of kin. However, if the person is in debt, the obligations have to be settled before the assets can be placed under the ownership of the next of kin. If the deceased has not written a will, the judge should decide how to distribute the assets. In this case, paying obligations is the top priority. Once the obligations have been settled, the remaining assets can be distributed to the rightful individuals. The judge has the right to appoint an administrator to decide how the assets will be distributed.
Creditors also have the right to file claims in probate. This is the process of establishing the validity of the will that is claimed to have been written by the deceased. If the heirs attempt to bypass this process, the creditors can sue them. Once the will has been passed on to the heirs, the creditors might go unpaid. However, if they contest the will, a court will be able to decide a rightful distribution of the resources.
2. Find out Who Needs to Pay the Debt
In some cases, a family member or business partner might be responsible for paying for some of the debts. Once the individual has passed, it is important to consult lawyers because they will advise you regarding your responsibility for paying the debts. This will help things go smoothly because the grief process can be challenged when paired with other disturbing issues.
One of the cases where you might be responsible for settling debts is where you cosigned a loan with the deceased. If you had a joint account with the individual, you would also be required by the law to pay the debts. A co-holder of a credit card will also be responsible for paying the deceased’s debts.
Parent and a Child Case
Another case is that of a parent and a child. The parents might be required to pay for the medical bills incurred by the deceased child. They will also be responsible for paying for any expenses incurred during hospice care. A spouse might also be responsible for paying the debts of the deceased. However, before you agree to pay any debts, it is important to seek a lawyer’s advice. The lawyers have a lot of experience and knowledge regarding such cases and will advise you accordingly. You do not want to spend your money on paying off a debt that you are not legally obligated to pay.
3. Consider the State Laws
The state laws regarding what should happen to an individual’s debt when they pass away vary from one state to another. Therefore, you need to familiarize yourself with the laws of your state to ensure you do not pay a debt that you were not supposed to pay. Some state laws might require the spouse to pay the deceased’s debts. In such a case, the state might require the administrator to pay the debts using the money for jointly owned accounts between the living and the deceased. If the law requires so, the living will have no objection to the decisions.
Some creditors might try to take advantage of people that do not know much about the state laws. Therefore, it is advisable to involve lawyers that understand these laws well. The lawyers will be able to advise accordingly to ensure you act according to the law. Obstructing the payment of debts might also cause your penalty charges. This is the last thing you want to deal with while mourning the death of your loved one.
Community Property
In some states such as Nevada, California, Louisiana, Arizona, Washington, Texas, the surviving spouse can use the community property to pay for the deceased's debts. However, if they do not have a joint account or a co-signer, the living spouse will not be under any obligation to pay the debts.
If the deceased's debts exceed the value of their assets, the state will determine who will get paid and the amount they should get paid. In this case, insolvent probate is declared, whereby the unpaid debts are written off. An insolvent estate is usually turned over to a public administrator or attorney.
4. Avoid Mistakes
In most cases, people are usually in a hurry to pass on the assets to the next of kin. This is the first mistake that you can make because the creditors might sue you. Once an individual has passed away, the creditors have a period of three to six months to inform the family members about the deceased's debts. Therefore, if the probate process is completed before the debts are paid, the heirs will face litigation.
Notify the Creditors About the Death of Their Debtor
Another common mistake is failure to notify the creditors about the death of their debtor. If that does not happen, the creditors might request payments later when the estate has already been distributed to the necessary parties. This means time-consuming litigation might be involved to ensure the creditors have been paid the rightful amount.
Another mistake occurs when the assets are distributed before you determine whether there is enough money to cater for all the liabilities. If you are certain that the value of the assets is enough to cater to the debts, you can pay them as soon as possible. If you’re not sure, it is important to wait for the probate process to be over to determine the number of liabilities that need to be paid. You should also not overlook secured loans when deciding the assets to keep. If you keep an asset used in a secured loan, you might eventually lose it to the creditors.
5. Be Reasonable With the Debt Collectors
When an individual has passed, their loved ones are left in grief, and therefore subjecting them to debt collecting might be damaging to their emotions. However. The debts have to be paid, and the loved ones are responsible for ensuring the process goes on smoothly. Therefore, it is advisable to be reasonable with the debt collectors and assure them the debt will be paid. This will help avoid unnecessary lawsuits that might be emotionally and financially draining. The debt collectors have a lot of experience in the tasks, and therefore, they will understand.
If a reasonable process is involved in settling the claims, the creditors will also be reasonable enough to allocate you enough time to settle the debts. If the estate has been filed for probate, the law requires the creditors to file claims. This will reduce your burden of having to deal with debt collectors. If the debt is in the defendant’s name, it is advisable to seek a lawyer’s advice before engaging in any agreements with debt collectors.
6. Consider the Deceased’s Plan
When someone dies, their family will face the obligation of paying for debts. However, there is a simple way of protecting loved ones from being subjected to paying debts. If the deceased had life insurance, the family would have an easy time settling the debts. Once the person has passed away, the insurance company will offer the family money that can be used to offset the debts, make funeral arrangements and help the family with other financial challenges.
In most cases, people will have a will written ready for use when they pass away. Therefore, you should speak to the individual’s lawyers to determine whether they have written any wills. If the will is available, it will make it easy for you to pay the creditors and distribute the rest of the estate. In the absence of a will, the court will have to decide how the wealth will be distributed.
Another thing to consider is the availability of electronic passwords. People often give out such passwords to help in the event of their death. Therefore, you should enquire to find out whether they left any passwords that could help in distributing and managing their estate. The deceased plan is always the best idea to follow in settling the debts they left behind.
7. Assess the Risks of Paying the Debt
Assessing the risk of debt helps in determining whether it is worth paying for or whether it should be compensated with assets. The amount of debt left when an individual dies will vary from one person to another. In some cases, the amount might be too huge to the extent that it has to affect the loved ones. An example of such is secured debts such as mortgages. If the mortgage has not been fully paid, the livelihood risks losing their home. Therefore, it is important to assess the risk of debts before deciding on how to settle them.
In the case of a mortgage, the living can come up with a plan for paying the remaining amount. If this amount is not paid, the bank will take possession of the house, and this means the living will lose their home. However, if they can afford to pay the remaining amount, it would be better than losing the house. In other cases, it could be too costly to pay the amount, and the family has to leave the house.
Other Secured Loans
Other secured loans, such as car loans, can also be challenging to offset. If the family members or someone supposed to win the asset cannot afford to pay for the remaining installments, they prefer to let the bank take the car. In these cases, it is important to assess the risk of keeping the car or giving it away. If the debt totals to an amount that is way less than the value of the car, it is advisable to pay the remaining amount and keep the car. If the person had just started paying the loan, the amount might be too high to keep the car.
8. Consider What Debt to Pay First
As pointed above, some debts are payable by the spouse, co-signer, or parents. Once your loved one has passed away, it is important to determine their debts as soon as possible. This will help you come up with a plan on how they will be paid. Secured loans are usually paid first, while unsecured loans are paid last.
Unsecured loans such as credit cards are paid from the assets after other loans have been settled. Therefore, if the deceased’s assets were not enough to pay for the credit cards, the creditors would suffer the loss. If the assets are enough to pay the debts that need to be paid first, the creditors might also be lucky enough to recover their money.
If you consider the debt that needs to be paid first, you might be able to salvage valuable items that are needed by the rest of the family. An example of such an asset is a house that was on a mortgage asset. If the beneficiaries still want to live in the same house, they can make arrangements for how to pay the mortgage instead of paying for it using the assets. The assets can then be used to offset other obligations. This way, the beneficiaries will not incur a lot of loss from the assets they were supposed to benefit from.
9. Did they have a Trust Fund?
A trust fund is one of the most important estate planning tools that makes it easy for beneficiaries to settle the debts left by the deceased.
It involves the use of a legal entity to hold property on behalf of the beneficiaries. The trust fund includes the beneficiary, grantor, and trustee. The trust fund sets the various rules on how the assets should be passed on to the beneficiaries.
Therefore, you should find out whether the person had a trust fund to make the process of distributing assets an easy one. If the person had a trust fund, they would avoid the hectic probate process. The trust fund owns the estate, and this means that the estate cannot be subjected to probate.
If the assets have been placed in a trust fund, it does not mean that they are fully protected from creditors. If you had credit money, the creditors could still sue to be paid. However, the trust fund means that you have more flexibility in paying debts than you had when facing the probate process. It also saves you from facing the hectic probate process.
If the person had a trust fund, their executor would do a good job in negotiating with the creditors with the hope that they would reduce the debt amount. This increases the chances of the heirs benefiting more from the assets as compared to a situation where the assets were used to pay debts. Credit cards also have an opportunity to sue for their payments. However, the legal fees for pursuing such litigation are high, and they would prefer to settle for the amount being offered by the executor.
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In Conclusion
Now that you have known what happens to the debt of your loved ones when they die, we believe that you will not have many burdens added to your grief. Also, it is important to ensure that your loved ones will not have debt challenges when you pass away. It is important for people to keep a list of their assets and other necessary information such as account numbers and creditors. This information should be provided by a trustworthy individual who will help your loved ones deal with financial issues when you die. You can also ensure that your passwords are accessible to family members because this will make it easy for them to sort debt issues.