Mo Vidwans
We never think about debt this way. This is probably because we are assuming subconsciously that it will not be our problem or somebody else is going to handle it or perhaps it disappears along with us and evaporates into thin air. In actuality, nothing of this happens. We will look at it here as to how it gets handled. Every State has laws about this issue, which can be a little bit different from other states, and there are also federal laws that we have to consider.
Almost everyone dies owing some debt; according to credit bureau Experian, the average total balance of debt for US consumers in 2016 was over $61,500 per person. Some have a natural aversion to debt and they want to finish paying their debts back, like auto or home mortgage, as fast as possible; I have noticed that many Asians, and actually Europeans too, fall into this category because they are just not comfortable owing large chunk of money, like a home mortgage, to someone else. But still, because of the nature of the beast, most of us will pass on with at least some debt to our name (unless we pay cash for everything); and this debt comes from the normal functions of our daily life like monthly credit card charges or many monthly ordinary bills and expenses like food/clothes/shoes and gasoline, insurance payments, utilities and medical bills.
But there can be shocking surprises to the survivors, children or trustees (Administrators) – debts unknown to the children or even to the spouse of the deceased. Once the trustee(s) start digging into the details of the estate they may discover large credit card balances, gambling debts (quite common) and/or undisclosed home equity loans, for example.
What happens to these debts after death?
In short, any debt incurred by you, in any form or shape, belongs to your estate (the cash money and the bank accounts, broker accounts, real estate and other property that is left behind); and your estate is being handled by your Trustee as per your wishes in your Will. Very rarely someone will die penniless. Most of us have assets, some of these we know about as mentioned above, some we have forgotten like the life insurance if you are the owner of the policy. When one dies, with enough assets to cover the debts, the creditors are entitled to that payment first. After your creditors are paid, your beneficiaries will receive what is left over. If you have a Will that specifies how the leftover money should be distributed then it is relatively easier, otherwise for intestate estate it becomes complicated because State laws come in the picture. This is just another solid reason why everyone must have a Will.
If there isn’t enough to cover your debts, creditors get some but not all of what they are owed. State laws provide an order of priority for the order in which the debts are to be settled if there are not enough assets to cover all the debts. Generally family members don’t become responsible for a deceased’s debt but many worry that they might be.
A key question to be answered here is under what circumstances the creditors can come after you. Clearly with loans secured by a property, such as mortgage or car, an heir has to keep up the monthly payments or else sell or get rid of the property to cover the debt. Unsecured loans/debts such as credit card balances and student loans are another matter. One of the reasons why credit cards charge such high fees and interests is just that: credit card balance is a loan and that loan is a high risk loan since it is unsecured. Federal student loan debt is eligible for cancellation upon death but private student loan institutions typically won’t offer the same benefit and may go after a deceased borrower’s estate for payment.
At death, unsecured creditors cannot collect from life insurance payments or from all bank or brokerage accounts, 401Ks, IRAs that have beneficiaries named for them naming the people who will inherit them. They are safe only if they are handled “right” before death. What is meant by “right” is that the deceased filled out the proper beneficiary forms. I have mentioned this on many occasions in the past articles. If it is not done, those funds will be paid into the estate where they are accessible to the creditors. Jointly held property passes directly to the survivor owner.
Debts signed by co-signers or co-applicants can also result in those debts falling back onto co-signers lap and are held responsible for it; you owe the balance no matter how high it is. Because of this reason, unless you absolutely positively must, co-signing for a debt instrument or credit card is not a good idea.
Spouses are generally not liable for any separate debts their mate incurred before the wedding or in some cases after, too.
Rules in community property states (there are nine of them in this Union such as Texas, California and so on) are different. Your community property can be tapped to pay souse’s debts. But creditors cannot touch your individual property. Some states including North Carolina take the marriage vow of “in sickness and in health” seriously and hold spouses responsible for each other’s medical bills and medical debts.
Final medical bills are usually considered a spouse’s responsibility; the admission papers you signed when your spouse entered a hospital probably included a payment agreement, even though we don’t pay much attention to it at the time being in such a frenzied state of mind. This is true especially if it had been an emergency.
Something the survivors should know or remember is that creditors play hardball and flex their muscles just to get you to willingly assume the debt. On many occasions that is not the case and you need to know your rights.
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Mo Vidwans is an independent, board-certified financial planner. For details visit www.vidwansfinancial.com, call +1 (984) 888-0355 or write to [email protected].
