When a loved one passes away, especially following a lengthy illness, relatives often worry about managing debts following their passing. Are they going to be responsible for paying any of their debts? Are there enough funds in their financial institution to cover those debts? Or will the debts be reprieved following death?
This post discusses how different kinds of debts are managed throughout probate and which debts might continue to impact family members.
Are You Responsible for the Liabilities of a Deceased Relative?
It is the responsibility of the estate executor to pay overdue debts from the deceased individual’s estate throughout the administration of the estate or probate process. Usually, heirs are not obligated for paying the debts of the deceased, no matter what some debt collectors may have you to believe.
You may be responsible for paying off a debt if you:
- are owner of any portion of the debt
- have received significant benefits from the debt itself (for example a loan used to pay for personal livelihood)
- were co-signer on a loan
You can learn more about specific types of debts by reading the following.
How Are Debts Paid Following Death?
Payments are made from the assets of the estate. The assets available for a creditor to bring a claim against might be subject to if the decedent had a trust and the kind of trust they had. A living trust is not going to safeguard assets from creditors.
When you have a will, your estate is going to undergo probate. The executor of your estate’s is going to collect all of the estate’s assets and is going to make a record of all debts.
Some debts might not be legitimate. For instance, creditors might pursue a decedent spouse’s estate for liabilities of an ex. It’s the executor’s duty to establish which liabilities are legitimate and which aren’t.
Creditors of secured debts have the capability to seize the item used to secure the debt, or they can get payments from the estate. Creditors of un-secured debt have a stake in the estate.
Life Insurance Policy Death Benefits and Debt
Death benefits from life insurance policies that don’t have an appointed beneficiary are going to become part of the estate. This can be utilized to pay down debts. Financial Institution accounts, investments, retirement accounts — these can all be utilized to pay off secured and un-secured debt.
When there are insufficient funds, the executor could sell some of the estate’s assets in order to pay creditors. Beneficiaries and heirs are going to receive their portion following the debts of the estate have been paid off.
When there are insufficient assets to cover debts, the estate is deemed “insolvent” and the heirs are going to receive nothing. But they are not going to be responsible for debts.
Are you a designated beneficiary of a life insurance policy? These beneficiaries are not required to use the earnings they receive from the policy to pay their loved one’s debts following death.
Kinds of Debt: The Basics
There are common kinds of debt that most individuals are going to face in their lifetime:
- Medical debt
- Funeral expenses
- Credit card debt
- Personal loans
- Co-signers on debt
- Mortgage debts and liens
- Vehicle loan
- Student loans
These kinds of debts are detailed below.
Frequently, the costliest time in an individual’s life is their last days of life in a hospital. It could be socking to get that last medical bill. This debt is not dismissed following death. It becomes a responsibility of the estate.
Families might also be hit with a totally unexpected medical debt following death: Medicaid estate recovery.
In 1993, the federal government required that states recoup long-term care expense for Medicaid beneficiaries fifty-five and older. While an individual is receiving Medicaid, they are permitted to possess a house, but once the individual dies, Medicaid could demand re-payment and may even force the sale of the house.
The expense of funeral and burial or cremation cost is a portion of the debt of the estate unless the decedent pre-paid for these costs. A lot of funeral homes provide pre-paid funeral plans.
Credit Card Debt
Credit card debts are associated to the credit card account holder and needs to be paid from the estate. Executors can petition credit card balances of the decedent’s account.
Under a condition of the CARD Act, the card issuer has thirty days to provide the balances and cannot impose any penalty fees or interest should you or the estate pay off the balance within thirty days following it providing that information.
Family members should not have to pay for their deceased relative’s debts unless they are a joint account holder, or a sanctioned user and the debt was theirs. Nevertheless, those that live in community property states, in which property and assets obtained throughout a marriage are deemed jointly owned, could be accountable for their spouse’s debt.
Credit card companies are typically out of luck if there is not enough funding in the deceased estate to go around. Nonetheless, creditors might try to collect. If you think you are being tormented by an over-the-top debt collector, get a hold of the Consumer Financial Protection Bureau. It is vital to understand your rights pursuant to federal and state law.
The decedent might have received a personal loan from their parent or relative or friend. That loan might or might not be a legally valid claim towards the estate. Fingers crossed, the agreement and its conditions were in writing. Agreements, verbally, can also be legally valid. Should the executor have worries, they may want to speak with a probate attorney for legal counsel.
Often, the decision to repay a personal loan might go beyond what is legally necessary for the benefit of family relationships. Heirs may be in agreement that the estate needs to pay back the loved one.
If the decedent made a personal loan to someone, that debt owed is to the estate. It is the executor’s duty to collect that debt.
Pledges / Promissory Notes
The decedent might have made a financial pledge — in writing or verbally. For instance, they might have promised money to their local boys and girls club, a school campaign, or a charity. There is probably a written account of that pledge.
But is the decedent donor’s pledge binding? Is the estate required to honor it? It is subject to your state’s laws, the essence of the agreement, and a couple of other aspects.
In California, an agreement is not binding unless it has all 3 parts:
- The offer
- An acceptance
“Consideration” means some sort of mutual or benefit promise.
Obviously, the deceased is required to be of sound mind when making such a pledge. Gifts and pledges from older individuals with dementia, or made under the undue pressure of another, can be contested by the estate.
Verbal Pledges Without Proof
What if the deceased made a promise to assist with college costs for a nephew? Everybody in the family heard them say it. They’ve been saying it for years. Their nephew was counting it.
That verbal statement is not going to be a legally binding pledge. Heirs might be in agreement among themselves that it the estate should honor it, but an heir could also challenge that decision in court.
Nevertheless, many courts have imposed verbal promises of an inheritance. This happens if the deceased individual benefitted from the actions of the individual that thought they were going to inherit. Did the nephew clean his aunt’s house each week since he believed she would pay for college? He might want to speak with a lawyer about probate litigation.
Some kinds of loans, like vehicle loans, student loans, and mortgages, might have a co-signer. If the deceased or a beneficiary was the co-signer, the extent of their responsibility is going to depend on the conditions of the contract that they signed.
A probate attorney can examine the contract and offer legal counsel.
Mortgage Debts and Liens
Like credit card debt, mortgage debt is the responsibility of the mortgage loan borrower. When a spouse was designated as a joint owner on the mortgage, then they remain responsible for the loan.
When a spouse is designated on the title as a “tenant in common,” they are responsible for the mortgage loan, however, the estate and/or other heirs are additionally liable.
Co-Signers Are Commonly “Co-Borrowers”
In a lot of cases, co-signers on mortgages are really a “co-borrower.” The degree of their interest in the property is subject to the title. Even when they have never lived in the house, they could be on the title as a tenant in common or a joint tenant, in which event they are liable for the mortgage.
Say the decedent was the co-signer? Is their estate obligated when the primary mortgage holder makes no attempt to make a payment? It might be. Go over the mortgage loan agreement. The co-signer might be responsible for the debt until the last payment.
A note against a home also continues following the borrower’s passing. To stay in the home, the surviving spouse is required to continue to make payments on the note or sell the house to pay the note off.
A lien is a legal request against a property for an overdue debt. It could be brought by a financial institution, by a tax authority, by a mechanic or contractor, or another kind of creditor.
The lien remains with the property until it is paid, whether by the estate, by a new heir, or by the forced sale of the house.
A car loan is not exonerated upon death. It becomes the liability of the estate and any co-signer.
The estate can submit a death certificate to the bank/lender and pay-off the full amount on the loan and pass the vehicle along to the individual that is named to inherit the vehicle. When there is insufficient funding in the estate for paying off the loan, the designated heir can try to assume the loan or can get a new loan and pay-off the old loan.
Should the estate or the heir not take over vehicle payments, the vehicle can be repossessed. At that time, the estate and any co-signer on the vehicle loan can be held liable for the “deficiency balance.” In other words, for the difference between what is owed on the vehicle loan and what the vehicle sold for following it being repossessed and re-sold. There are also going to be repossession fees.
Federal and Parent PLUS Student Loans
Student loan debt looms over individuals of all ages. One little bit of wonderful news for this kind of debt: federal student loans are forgiven upon the passing away of the student. The student’s estate is not liable to repay any leftover federal student loans.
A parent PLUS loan is forgiven with the passing away of the student or the passing away of the parent liable for the loan. A co-borrower or endorser on a student loan is also forgiven from repayment.
Private Student Loans
Private student loans are another issue. These lenders differ in how they manage student debt. Sallie Mae and several other lenders forgive the debt following death. Other lenders are going to necessitate that a parent to continue to pay on a parent-student loan. Speak with your lender to learn their conditions.
If there was a co-signer on a student loan that is private, the co-signer is typically forgiven from responsibility if a student passes away.
Speak with an Attorney to Learn More About Debts Following Death
Don’t wait until a vital moment to work out your estate plan. You should have good comprehension of the laws and how they are going to affect your family if anything happens to you. Talk to an estate planning attorney near you to learn more concerning life insurance policies, credit card debts, and more.
Staff, F. L. (2022, June 9). Debts after death. Findlaw. Retrieved October 14, 2022, from https://www.findlaw.com/estate/estate-administration/debts-after-death.html
There’s nothing better than the peace of mind you will have knowing you’ve protected your family at a time when they need it most. Let us help. Schedule a consultation or contact Ogborne Law, PLC of Arizona today.