Having debt in life is stressful enough, but can it follow you into eternity? Well, not exactly, but your debts do not just disappear when you die. Financial stress can be difficult, and the statistics can be rather gloomy. One Experian survey reported that 73% of U.S. citizens in 2016 passed away with some form of debt. Luckily, if you are reading this article, you still have time to plan. Read along as we go over the common types of debts and the associated laws and break down what an estate planning lawyer can do to ensure your assets go where you want and your family is taken care of.
Who Assumes Responsibility for My Debt When I Die?
Once you pass, your estate (the collection of all of your assets) is distributed in a legal process called probate. If a will has been prepared, the executor named in your will distributes your property and pays any debts or taxes you owe. If you die with no will prepared, a probate court will split up your estate on your behalf.
With or without a will, the debts you owe when you pass are paid by the estate. If there is not enough money in the account to cover the debts, then it will likely go unpaid. Each state has different laws for which debts are required to be paid and in order of importance. Once the money runs out, some debts will go unpaid and be written off by the lender. However, any shared debt will become the responsibility of the joint owner. Cases where this commonly occurs are:
Joint accounts on credit cards
Co-ownership of a home or car
Co-signers on loans
Unless you are on the account, executor of the estate, a spouse, or the parent of a minor, it is illegal for creditors to try to get money to settle a deceased person’s account.
In the case of mortgage debt, the remaining mortgage will pass to any co-owners or inheritors. However, mortgages are protected in their passing, so the new (or remaining) owner will not be required to pay the remainder of the mortgage in full. The co-owner or inheritor may choose to sell or continue to make the monthly mortgage payments.
If no other person inherits or is already in co-ownership, the lender may repossess the home and sell it to settle the debt.
Credit Card Debt
The responsibility for credit card debt will be dependent on ownership of the account. If there is only one account holder, the estate will pay the debt. If there is insufficient money in the estate, the debt goes unpaid and will be written off by the creditors. For joint accounts, the other party will assume responsibility for the debt and be required to make the monthly payments.
Student Loan Debt
Federal student loans are not required to be paid upon death and are forgiven by the institution. Directly on the Federal Student Aid website, it states that any Federal Student Loans or Parent PLUS Loans are dissolved (for either the parent or student in PLUS cases) once proof of death is submitted. The accepted documents for proof of death include an original death certificate, a certified copy of the death certificate, or a photocopy of one of those documents. The estate pays private student loans if there is enough money to cover the payments.
Car Loan Debt
Your estate will pay your car loan, or whoever inherits the car can make the decision to continue with payments or sell to pay the loan. In cases where there is not enough money to cover the debt, the lender can repossess the car.
Home Equity Loan Debt
The person who inherits a house with a home equity loan will not only be responsible for the debt but can be forced to repay the loan immediately. It is important to note that home equity loans are not subject to the same protections that preserve the mortgage inheritor's rights to continue the loan as previously agreed. In cases where there is not enough in the estate, and the inheritors cannot afford to pay, the house can be sold to pay the loan or foreclosed by the lender.
Timeshare debt can be paid with the estate if there are sufficient funds. However, timeshares are tricky and may not go away if unable to be paid. Most contracts contain a “perpetuity clause” binding the inheritors to continue paying the annual maintenance fees. In cases where the estate cannot cover the debt or the inheritor is unable to pay, the resort developer may foreclose and take back the timeshare.
Medical debt inheritance can vary on a case-to-case basis due to a few factors. The first factor is that the state where the person lives might have laws pertaining to the inheritance of medical bills. Community property & filial law states both require the continued payment of certain medical debts. The second factor is Medicaid recovery. If the deceased party received Medicaid and was 55 or older when they passed, state programs can recover associated payments from the deceased’s estate. These payments can include nursing home care, community-based services, and prescription drug services. According to the U.S. Department of Health and Human Services, Medicaid programs cannot pursue repayment if the deceased party has a spouse, child under age 21, or a blind or disabled child. The final factor is determined by whether or not there was a co-signer on the bills. In that case, the co-signer would assume the associated debts.
Community Property States
Community property states dictate that both spouses are equally responsible for any debts incurred post-marriage. Meaning that any purchases made with shared funds can become the responsibility of the remaining spouse. A personal estate lawyer can aid in sorting out what you are responsible for following the passing of your spouse. The fifteen “community property states” are as follows:
Filial Responsibility Laws
Filial Law requires children to provide financial support to their parents if they cannot afford their bills. Most often, these bills pertain to nursing home costs and other medical debts. There are 30 states in the U.S. that follow some form of Filial Law. This law is most likely to apply in cases where the parent does not qualify for Medicaid or has medical bills they cannot afford, and their child has the ability to pay.
What Can Creditors Take From My Estate to Pay My Debts When I Die?
Creditors have specific guidelines that they must follow when looking to settle a deceased person’s debt. The exact time frame will depend on your state, but creditors usually have six months to submit a claim. The lender may repossess the property if the estate does not have enough money to cover secured debts, such as a mortgage or an auto loan account. With an estate planning lawyer, you can make arrangements in your will or estate plan to have a trust to repay the secured debt over time. Though creditors cannot use funds from life insurance benefits or living trusts, anything that you have of value (think ATVs, boats, your rare shoe collection) can be liquidated to pay off debts.
How an Estate Planning Attorney Can Help
To avoid leaving your grieving family to sort out your debts, contact an estate planning attorney to ensure there is a plan following your passing. Your attorney can help to avoid conflict between family members and help to clarify which debts they do and do not have to pay. Further, your plan will be legally binding to ensure your assets get to the people of your choice and any loose ends are tied to allow the family peace of mind to grieve the loss of their loved one. Below is a short list of some of the benefits of working with an estate planning attorney.
Create a will
Establish power of attorney
Clarify or work towards the reduction of estate taxes
Guidance during the probate court process or avoid it altogether
Set up trusts to protect your assets
Confirm the plan is in line with state and federal laws
Guide your fiduciary, executor, and individuals with power of attorney according to your plan following your passing
Aid the beneficiaries in the case where a person contests the will.
Attorneys who specialize in estate planning can charge either a flat fee or an hourly rate for their services. They can assist in managing the estate, act on behalf of the deceased to resolve any conflicts, and ensure that their will is executed according to their exact wishes.
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