One of the most frequent questions I get is “what happens to debts when someone dies?” Usually, this question is asked as people begin thinking about their aging parents or other relatives (let me know if you need a rec for a kick-butt elder law attorney!).
Let me tell you straight up: death does not extinguish debts.
In other words, when a person dies leaving a debt, such debt does not automatically go away. It’s an understandable misconception, that debts die with the debtor, but it’s exactly just that–a misconception. (Thinking about it, maybe I should have included this in the Myth Series, huh?)
Going back to my main point, here are a few things you must know about debts when a person passes away.
In general, the estate of the deceased person is answerable for unpaid debts. A creditor (that is, the person to whom a debt is owed) need not worry about being empty-handed when the person owing him passes away. A creditor can make a claim against the estate of the deceased, so that they can get back what is due before the money and properties of the deceased debtor are distributed to loved ones and beneficiaries.
Remember our discussion on executors? Basically, the executor is responsible for this–if a creditor makes a valid claim, the executor of the estate of the deceased debtor will have to set aside the corresponding amount to settle the debt. It is only when these claims are settled when the executor can distribute to beneficiaries.
When might someone else be liable? In some instances, others may be responsible for the payment of the deceased’s debts, instead of charging them against the estate. Here are a few examples:
When a loved one is the co-signer on the deceased’s loan,
When the deceased and another person are joint credit card account holders,
When property is co-owned and has a remaining debt (like a car note), the surviving owner is still responsible for the debt
Wait, what about mortgage debts? Like with the car note mentioned above, if the mortgage is shared with another person (usually a spouse or partner), then the survivor would be responsible for the loan. If, on the other hand, the mortgage was not co-signed by anyone else, then that’s that–no one will have to be forced to pay.
But . . . (yes, there’s a but) . . . If no one takes over the mortgage payments, the mortgaged property, of course, will have to be foreclosed (i.e., the bank sells the property to pay for the remaining loan balance). Thus, if loved ones wish to keep the property and use it for themselves (or even if they decide to sell the property, perhaps), the consequence is, naturally, that they will have to keep making mortgage payments.
Debts are a normal part of life for most of us. And worrying about who will bear these expenses is a natural thing! The bottom line is that (with the few exceptions discussed above) the ESTATE is liable, not the survivors. That said, with careful planning you can protect assets that you want to leave for family and friends. (Hint, hint--have you heard about trusts?) Still have questions?
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Until then, talk to you guys again on the next one!