Generally, people don’t like to talk about their own death, much less plan for it. Although it’s only human to fear the end of your life, you should still be aware of the consequences for your loved ones that outlive you, especially if you have debt. Have you ever thought about what happens to debt when you die? Or what debts are forgiven at death–if any?
In addition to creating a will (either a living will or just a last will and testament) and/or a trust (either revocable or irrevocable, depending on what’s best for you), you have got to learn what happens to debt after death. By getting your affairs in order, you will save your loved ones many headaches and money problems.
What Happens to Debt When You Die?
It depends on the situation. If all of your debt is only in your name, it will come out of your estate after your death. Not sure if you have an estate? Everyone does. Your estate is simply everything you own when you die, such as:
- Bank accounts
If you took the time to create a will, the executor (or the person you put in charge of executing your will) is responsible for carrying out everything you outline in that document. In this legal process known as probate, the executor doles out inheritance, pays debts, handles your assets, etc.
What is the Purpose of Probate?
The purpose of probate is to make sure that wills are honored, and post mortem liabilities are taken care of. The word probate encompasses the legal process of dealing with the deceased’s assets and debt, the court that oversees it, and the actual handling of the assets. Unfortunately, depending on the amount of debt, the value of assets, and the number of beneficiaries of a will, paying debt can cut into the overall estate and take away from beneficiaries.
If there are issues with the will or squabbles among beneficiaries, you may need to hire a probate lawyer and go to probate court to settle disputes and navigate the complex process. However, while you’re still alive, you can get your affairs in order to ensure your loved ones can avoid probate as much as possible.
What You Need to Know About Debt and Death
There are a number of things that can happen to debt after death, but there are a few bits of essential information that you need to be aware of. The following list includes the most important facts you need to know about who is responsible for debt after death.
Debt Is Not Inherited Unless…
If all of your accounts and assets are in your name and your name only, none of your family members will inherit debt, not even your spouse. If you have a joint account with your spouse or, for example, your dad co-signed on your car loan, they’ll inherit those unsatisfied debts.
What happens to your debt when you die and have no family, co-signers, or joint accounts? Your estate handles it. However, if you live in a community property state, your rules are different.
Federal Student Loans Will Be Forgiven
If the borrower of a federal student loan dies, then the loan is forgiven. A loved one will need to provide an original or certified death certificate. Don’t confuse federal student loans with private ones. Although some private loan servicers offer forgiveness at death, not all servicers do. There is no law that forces lenders to cancel a loan. Make sure you check with the loan servicer.
Creditors Will Try to Scam Your Loved Ones
If no one in your life legally inherits your debt after you die and your estate isn’t vast enough to cover those debts, creditors just have to take a partial loss. What happens to your debt when you die if you have no assets or others responsible for your debt? Creditors have to take a full loss. Just because your loved ones aren’t responsible for that debt doesn’t mean creditors won’t try to get them to pay anyway.
When your loved ones don’t need to pay, it’s best left that way. If they agree to pay even a small amount, they could end up legally responsible for all of the debt. If they tell the creditor never to contact them again, the creditor has to honor that.
Creditors and Their Claim to Your Estate
Even if no one stands to inherit your debt, inheritance can be diminished in probate court. To satisfy outstanding debt, creditors are legally entitled to anything in your estate– including family heirlooms and your home. A probate lawyer can help your beneficiaries fight for what’s theirs.
You should know that creditors only have a certain amount of time to make a claim against your estate. If they miss the window, they’re out of luck. With that said, creditors have to be informed of your death. Failing to do so will extend the creditor’s claim window or leave your loved ones responsible for the debt.
Don’t Use Accounts
The final piece of information you need to know about debt after death is that your family — even authorized users on credit cards– have to stop using your accounts after you die. An account can only be used if it’s a joint account that holds another person accountable for the debt. All other cases can be considered fraud, and your loved ones will face legal repercussions.
Prepare for Death and Probate With an Attorney
Whether a death in the family is imminent or you would just like to be prepared so you or your loved ones can avoid the worst, now is a great time to create a trust and/or will. Depending on how affairs are coordinated, the probate process can be minimized. By hiring a lawyer to help organize your estate and legal documents, you’ll get an understanding of what to expect as far as debt after death and probate are concerned. At CJB Law, our expert team of attorneys is ready to help draft wills, draft trusts, and navigate probate. Contact us today for a free consultation.