The Truth About Debt and Death
Ever worry about having to pay a deceased family member’s debts or wonder who will pay yours? Laura gives you the facts (and peace of mind) about debt and death.
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When you die, there’s typically a lot of unfinished business to figure out—and some of the rules may surprise you.
If you’ve ever worried about having to pay a deceased family member’s debts or wondered who will pay yours, this post will give you the facts about debt and death, and hopefully put your mind at ease.
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What Is an Estate?
After you die, everything you leave behind becomes a legal entity called your estate. What happens to your estate depends on whether you die with or without a last will and the state where you lived.
Every estate must have someone who puts things in order, called an executor. He or she distributes your property, pays your outstanding bills, and settles your debts. I strongly recommend that you create a last will and name someone in it who you trust to be your executor.
If you don’t, the court will appoint an executor to handle your affairs for you. Just remember that it probably won’t be someone you know and they may not carry out your wishes the way you would have liked.
The executor’s job is to protect your assets, such as your home, household belongings, vehicles, bank accounts, and investments, and to pay your liabilities or debts, such as mortgages, credit cards, loans, and taxes.
See also: 4 Legal Documents You Should Have
What Happens to Debt When You Die?
If there isn’t enough cash in the estate to pay what’s owed, the executor must sell as much of your property as possible. For instance, if you don’t have enough to pay off a credit card, your car could be sold to raise money.
However, in most states, certain assets, such as your retirement funds, are safe from liquidation to pay creditors. If you name your spouse or child as the beneficiary of your 401k or IRA, they would receive the money, even if your estate were insolvent.
After all debts are paid, the executor distributes the balance of the estate’s assets to the beneficiaries as spelled out in your will, if you have one. For instance, let’s say you have a home with a mortgage and your will says that it goes to your sister. If you die and she accepts the property, she would also be responsible for making the mortgage payments going forward.
If there isn’t enough cash or property to cover your debts, then your creditors are generally out of luck.
A federal law called the Garn-St. Germain Depository Institutions Act allows a close relative who inherits a property to assume payments on the mortgage without triggering a due-on-sale clause. In other words, your sister could title the home in her name and make payments, even if the mortgage remains in your name after your death.
But what if there are more debts than assets in the estate and some creditors can’t be paid off? If there isn’t enough cash or property to cover your debts, then your creditors are generally out of luck.
If debt is in your name only, creditors can’t go to your family, friends, or heirs to collect it. Likewise, you’re not responsible for other people’s debt, except in certain situations, which I’ll cover in a moment.
Creditors also can’t go after property or cash that goes directly to someone else when you die, such as the beneficiary of your life insurance or retirement account.
All consumers are protected by the federal Fair Debt Collection Practices Act, which prohibits collectors from using abusive or deceptive tactics to try to collect a debt. Even though it’s illegal for creditors to collect a deceased person’s debts from someone who isn’t responsible for them, they may try.
Creditors have a limited period of time, such as up to 6 months, to make a claim against an estate. If it has no money, creditors have been known to prey on relatives in hopes that they’ll feel duty-bound to pay up. Remember, it’s the deceased person’s estate that is typically responsible for debts, not you.
I say typically because there is an exception known as filial responsibility that applies in 29 states and Puerto Rico. It may require adult children to pay for a deceased parent’s unpaid medical debts owed to a hospital or a nursing home, when the estate can’t cover them. Even though filial support laws have been largely ignored, court decisions in recent years indicate a renewed interest in enforcing them.