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What Happens to Debt When You Die

Losing a loved one is never easy, especially with the onslaught of decisions, funeral services, and final wishes that are left to resolve. After organizing a burial or cremation, it is important to locate the deceased’s documents. Many people leave wills with specific funeral plans or special requests. After taking the will to an appropriate county or city office to have it accepted for probate, you may also require the services of an estate executor to determine whether there are any transfer assets, estate taxes, income taxes, bank accounts, life insurance policies, and investments that require immediate attention. In this article, we will review what happens to debt when you die, so you can be better prepared in the event of your own death or know what steps you need to take in the event of losing a loved one. Keep reading to learn more.

What Happens to Debt When You Die

The general rule of thumb is that your debts die with you. This principle applies to financial debts and responsibilities held in the deceased’s name. With a few exceptions, heirs and loved ones are not held responsible for a decedent’s debt. According to the Federal Trade Commission (FTC), family members are not obligated to pay the debts of a deceased relative from their own assets. If the deceased incurred debt under his or her name alone, creditors either fail to collect at all or will rely on the probate process to cover loose ends from the residual estate. In the event that your loved one had no assets or the estate is insolvent, the family will not receive any inheritance.

Different Types of Decedent Debt

With the help of an estate executor, investment advisor, or lawyer, you can determine whether your loved one owed any remaining mortgage, home equity loans, credit card loans, or car loans. Unless a relative co-signed for a loan or has joint ownership of an asset, including properties and businesses, he or she is not legally obligated to pay toward any balances. Joint credit account holders are subject to any unpaid bills. If the estate runs out of assets to pay credit balances, however, those lending companies failed to secure their loans and leave family members free from any obligation. Estates should also pay toward private student loan debt, but federal student loans are discharged.

There are nine community property states in America, including: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These states treat any marital property as jointly owned between spouses and divided upon death. Spouses are not responsible for debts that predate the marriage, although half of any community property from a marriage could be put toward debt obligations. Common disputes can be avoided by proper estate planning during the spouses' joint lifetime. Family members who inherit houses can simply take over the mortgage payments or sell and distribute. The same rule applies to home equity loans. Creditors can force them to repay loans immediately, but most lenders are willing to work with new owners.

Plan and Prepare for Circumstantial Debt

Now that you have a better understanding of what happens to debt when you die, it is important to consult your family and seek counsel from a trusted legal professional. Remember that just because your family members and loved ones are not responsible for paying your debts, that does not mean that creditors will not try to collect or contact them. An estate executor should notify creditors as soon as possible, so the three major credit reporting agencies can help prevent identity theft or other common concerns. If you have any questions about this article, please contact Legacy Headstones today for additional information.