Nearly everyone leaves some bills or debts unpaid when they pass away. At the very least, there are unpaid hospital bills and utility bills that need to be taken care of. In many cases, there are credit card debts, home loans, and student loans among the sums owed, as well. These debts live on even when you don't. Before your family is able to inherit your assets, the assets are often first used to pay off any debts to your name. Your family only inherits the remainder.
Infographic Credit: Business Insider
If a person passes away leaving behind a home mortgage and no joint owner or beneficiary to inherit it, the executor pays the loan off from the estate. If there is a joint owner, or if someone inherits the home, however, they take over the payments.
Home equity loans
If the person who has passed away took out a loan against the equity that they had in their home, responsibility to pay off that loan rests with the person inheriting the home. The creditor may demand immediate payment in full. When this happens, usually, the inheritor needs to sell the house. In some cases, creditors allow the new owners to simply continue making monthly payments.
Money owed on credit cards
Credit card debts are unsecured in nature. Such money isn't borrowed against collateral. When a person dies with money owed on their credit cards, the bank gets in line to get paid out of the proceeds of the sale of their estate. They get paid out of resources left over after holders of secured loans are paid off. If there is nothing left, they don't get paid.
If a credit card has a joint holder, they can be held responsible for paying off money owed. If a credit card simply has multiple authorized users, however, those users aren't considered responsible.
What happens to debt when you die: money owed on the car
Estate executorspay for what is owed on a car loan left behind, out of the proceeds of the estate. If there isn't enough money to pay it off with, the car is repossessed. If a car is inherited by a family member or anyone else, however, they get to keep the car if they agree to take on the payments.
What debts are forgiven at death: sums owed on some student loans
Federal student loansare considered discharged at death. Wells Fargo and Sallie Mae are the exceptional private lenders who forgive student loans when their holders pass away. Other private lenders do collect. The estate usually pays for money owed on a student loan. It's unsecured in nature, however. If there isn't enough money in the estate, these lenders go unpaid.
When there is a cosigner to a private student loan, they are liable to take over when the primary holder passes away. In a community property state, the spouse inherits responsibility for the student loan of the deceased.
Creditors can't touch some assets
If a person dies leaving behind life insurance policies or a retirement account, the sums obtained from these sources go directly to the heirs named as beneficiaries. The estate's executor is not allowed to look to these assets to repay creditors. Money obtained from life insurance policies isn't even taxable. Taking out a life insurance policy, then, is an excellent way to leave money to your family. The only exception to the rule is if the beneficiaries mentioned in a life insurance policy are no longer living. In such a case, money from the policy goes to the estate, and is then accessible to creditors.
Are beneficiaries responsible for debts incurred at the hospital?
When there is money owed to the hospital upon the death of a person, the payment agreement usually requires that the spouse pay off the debt. If there is no money, however, hospitals usually forgive such debt.
Finally, sometimes, unscrupulous creditors are known to call surviving family members to try to make them falsely believe that they voluntarily assumed responsibility for the debt of a loved one after their death. It's important to watch out for such scams, and politely refuse to accept responsibility.
Bottom line is, you don’t want to leave debt floating around without having a plan for how to take care of it so your heirs won’t need to be left with it. Just like having a retirement plan and a plan for your inheritances, having a plan in place to pay off debts is also important. Talk to a financial advisor on how you can help with this or your overall financial plan.
Matt Logan is experienced with helping many individuals manage their finances for a multitude of reasons. If need help with you financial planning, reach out to Matt Logan to see how he could help. Give a call today: 336-540-9700.
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