What happens to your debt when you die?
What happens to your debt when you die?
They say there are two things certain in life: death and taxes. But after you pass away, you may be surprised to learn that something else can remain: your debt.
What to expect.
Contrary to what some may think, when someone passes away, their debts are owed by and paid from their estate. A personal representative, executor or administrator is responsible for handling the estate’s finances, which includes being accountable for paying any debts.
“Generally, your estate will become responsible for paying any debts when you die,” said Morgan Kilgore, assistant vice president and private client advisor for Commerce Trust. “If there’s no money or property left in the estate, sometimes a debt may go unpaid, but depending on the type of account, the debt could be passed on to a loved one.”
By law, family members typically won’t inherit a loved one’s debts, but you may end up being personally responsible under certain circumstances, including, but not limited to:
- If you cosigned on a loan
- If you’re a joint account owner
- If you live in a community property state and are the deceased person’s spouse
- If you live in a state that requires payment on certain types of debt like healthcare expenses and are the deceased person’s spouse
“Let’s say you and your parent were joint account owners on a credit card,” Kilgore said.
“Even if you didn’t incur the debt yourself, it can still be your responsibility if your parent passes away. The same would happen if you were the joint owner on a home; you would be responsible for paying the mortgage.”
It’s important to note that being a joint account owner is different than being an authorized user on a credit card. In most cases, you won’t be held liable as an authorized user. In community property states, Individual debt that one spouse incurs during the marriage is generally considered community debt — and anything considered community property is fair game for creditors. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Secured debt is a debt obligation that’s typically backed by collateral, such as a car loan or mortgage. If you default on secured debt, then the creditor may be able to seize the collateral in satisfaction of that debt. Examples of unsecured debt include credit card debt, medical debt, student loans or business loans.
“If unsecured debt isn’t paid, most creditors will start to charge a late fee,” Kilgore said. “After a period of nonpayment, most unsecured debt will be assigned to a collection agency.”
What to know if creditors start calling.
It can be unnerving and anxiety inducing when debt collectors start calling, and it’s often the last thing anyone wants to deal with after losing a loved one. But if you are the executor of their estate, you may hear from one attempting to collect. It’s important to know your rights under federal and state law.
“It varies from state to state, but typically there’s a period ranging from about four to six months in which creditors can make claims from an estate,” Kilgore said.
Credit collections are governed by the Fair Debt Collection Practices Act, which prohibits harassing behavior from creditors. The Act protects you against abusive, unfair and deceptive practices. For example, there are only specific times during the day they can attempt to contact you, and there’s only specific information they can leave on a voicemail when they’re trying to collect a debt.
The Federal Trade Commission (FTC) suggests reporting any violations to your state’s attorney general’s office, the FTC and the Consumer Financial Protection Bureau. Your state’s attorney general’s office can also help you determine your rights.
“If you’re concerned about the actions of a debt collector you could contact an attorney or report them,” Kilgore said. “Furthermore, it’s a good idea to reach out to an attorney if you have any questions related to the legitimacy of the debt, or even if it is something that would be your responsibility to pay.”
Hiring a lawyer can feel overwhelming, but it’s okay to ask for help when managing financial affairs. You may even qualify for legal aid from an organization near you. The FTC also provides Consumer Advice and resources to help navigate the often-confusing logistics of handling a loved one’s debt.
How to protect your loved ones.
Now that you know your debts may outlive you, there are steps you can take to protect your loved ones. Perhaps the most obvious option is to pay down any debts you may have, but that’s often easier said than done. There are many strategies available to help tackle the often overwhelming task of paying off debt, including paying more than the minimum payment or even debt consolidation.
“A good place to start is to pay down debts that have the highest interest rate first,” Kilgore said.
If you’re able, consider paying off loans early to avoid accumulating interest or refinancing for a lower interest rate. Your Commerce Financial Advisor can help you determine a plan that makes sense for you and can also provide advice about paying off your debt.
For many people, life insurance plays a critical role in their financial plan because it’s a way to provide some financial security to your loved ones after you die. There are many types, and some polices can offer both a living and death benefit. A living benefit rider allows you to have access to some of the money while you’re still alive — for example, if you needed extra funds to pay off medical debt from a critical illness. Be aware that if you do borrow against your life insurance, it may end up lowering the amount of the death benefit payable to the beneficiaries.
“Placing life insurance in an irrevocable trust or naming the trust as a beneficiary of a life insurance policy can add increased creditor protection,” Kilgore said. “It’s important to review the beneficiary designations with your attorney to ensure it’s properly titled to maximize creditor protection.”
Having a trust in place can also be an important tool. There are many types, but there are two general categories: revocable and irrevocable. You can change a revocable trust at any time during your lifetime but changing an irrevocable trust may require a court order or approval of all the beneficiaries.
“This makes an irrevocable trust a little less flexible, but it offers increased asset protection,” Kilgore said. “It can protect your assets from certain creditors, which a revocable trust cannot.”
Keep in mind that certain assets can still be protected from creditors. Assets are considered “non-probate assets” if they have a designated beneficiary, or if the account was jointly titled. For example, these could include retirement accounts or life insurance accounts.
A little planning goes a long way.
Debt doesn’t just disappear when you die, but with the right planning ahead of time you can mitigate any burden placed on others. Talk to your loved ones so they’re aware of your wishes and financial plan. And don’t be afraid to reach out for guidance along the way — your Commerce advisor can help you and your loved ones navigate the process.
While Commerce may provide information or express opinions from time to time, such information or opinions are subject to change, are not offered as professional tax, insurance or legal advice, and may not be relied on as such. Commerce Trust does not provide legal advice to its customers. Consult an attorney for legal advice, including drafting and execution of estate planning documents.
Commerce Trust is a division of Commerce Bank.
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