Debt and Death: Credit Card, Mortgage and Student Loan Debt After Death
When you die, are your debts buried with you?
As nice as that would be for your loved ones, going into a grave will not get you out of the hole. You’ll still be on the hook for unpaid bills. Well, you won’t, but your estate will.
And if you thought only rich people had “estates,” you’ll be pleasantly surprised to learn that just about everybody gets one when they die. An “estate” is the assets a person leaves behind. If you’re like most people, you’ll want your entire estate to go to friends, loved ones or maybe even your beloved Chihuahua.
About 2.6 million people die annually in the U.S. Considering that household debt was $12.25 trillion in the first quarter of 2016, it’s apparent that most of the deceased left unpaid bills behind.
If there isn’t enough money in the estate to cover all those bills, the creditor is usually out of luck, though there are potential wrinkles.
The deceased person’s estate inherits the debt, which need to be paid before any heirs receive money and that often requires a trip through probate court.
How Probate Court Works
What’s probate? It is the legal process for establishing the validity of a will and, depending on the number of beneficiaries, can be a long, frustrating process.
State laws stipulate how your assets will be distributed, and a judge is assigned to resolve problems in doing that. If you left a will, it serves as the blueprint for the distribution. Wills generally name an executor or administrator, who the probate court designates as personal representative to wind down an estate, pay debts and distribute assets.
A representative’s first job is to determine if your estate is solvent or insolvent, basically whether it has enough money to pay all your bills and debts.
To do that, the representative sorts through your financial records to learn how much money you had the day you died. This includes uncollected loans owed to the deceased, final paychecks, life insurance payments and retirement accounts payable to the estate. Then estate assets need to be tallied, including real estate and collected items like cars, antiques and stamps. These might require an appraisal, especially if there are multiple heirs.
The estate is insolvent if there are more debts than assets. For example, if your credit card debt and medical bills total $200,000 and your assets total $120,000, you are insolvent, since your estate doesn’t have enough to fully cover your bills.
The executor should look for all possible debts. These might include:
- Home equity or other lines of credit
- Condo fees
- Property taxes
- Income taxes
- Car loans
- Personal loans, including student loans
- Loans against insurance policies or retirement accounts
- Utility and phone bills
- Credit card bills
State and federal laws prescribe how the money will be divided and which creditors must settle for partial payments. Typically, the first draw covers costs related to administration of the estate. These are called ongoing liabilities. The remaining liabilities, those accrued before probate, including outstanding debts and the decedent’s final bills. Funeral expenses top the list, followed by outstanding debts and taxes.
One exception to debt repayment that anyone cosigning a loan should remember: Cosigned debts aren’t an estate’s responsibility — they belong to the surviving cosigner. So if you cosigned a car loan with a relative and the relative dies, you are obligated to repay the loan personally.
Whatever money is left over after prioritized debts are satisfied goes to other creditors. If for instance, you owed money to several credit card issuers, the remainder of your estate would be divided proportionally among them. The personal representative is responsible for paying the debts and rejecting inappropriate claims. Those with claims have a legally fixed amount of time to make demands.
If assets remain after debts and taxes are paid, they get divided per your will. If you didn’t have a will, the court might supervise the distribution of assets to settle disputes among the heirs.
After a statutory waiting period, the personal administrator can begin dispersals. This might include selling real estate and personal property, then dividing the proceeds among the heirs.
Below are some common probate questions that pop up after the death certificate is signed.
Can Creditors Go After the Entire Estate?
No. Life insurance and payouts from IRA, 401k, and other retirement accounts are protected. The retirement payouts continue as long as the beneficiary is alive. If the life insurance beneficiary were already dead, that benefit would likely go into the estate and be subject to creditors. So if your Chihuahua has died, it’s important to name a living beneficiary.
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Are Checking and Savings Accounts Protected?
They are fair game for creditors. If Uncle Hiram left you $15,000 in his savings account and had a $14,000 in outstanding loans, the lenders would get $14,000 and you’d end up with $1,000 and a diminished view of Hiram’s financial planning.
What if the Deceased Had a Mortgage and/or Auto Loan?
If you are a co-owner of the house or inherit it, federal law prohibits lenders from forcing you to pay off the mortgage immediately. As long as you continue making mortgage payments, the property is safe. It’s more complicated if the deceased had a home equity loan. A lender can force whoever inherits the house to repay the loan immediately, though they usually allow the inheritor to simply take over payments.
If an auto loan is not paid off, the lender could repossess the car. But as with home equity loans, the lender is unlikely to take action as long as the inheritor continues making the monthly payments.
What Happens to Credit Card Debt When You Die?
The heirs aren’t responsible unless they had a joint account or were a co-signer on the account. It doesn’t matter if the deceased person used the card 100% of the time. If you co-signed, you owe. If you were just an authorized user, you would not be liable, but you would be responsible for charges made after the cardholder died. So don’t whip out the Visa to bankroll a trip to Las Vegas to help get through your mourning period.
What About Student Loans?
Federal student loans are forgiven if the student dies, as are PLUS loans that are held by the student’s parents. Private student loans are a mixed bag. Some lenders offer a death discharge if the borrower dies. Others may go after the loan balance, which could come fully due when the student dies.
What About Community Property States?
Community what? Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. That means that surviving spouses are responsible for any debt incurred during the marriage, even if their name was not on the account.
That can come as a shocking revelation at a daunting time. After losing a loved one, the last thing you want to deal with is a stack of unpaid bills and creditors clamoring for their money.
Preventing Debt After Death
Many seniors are taking on debt late in life, specifically credit card, mortgage and student loans, and that creates an obvious problem when they die.
Research by the Federal Reserve Board showed 65.4% of families headed by individuals 55 or older has some level of debt. The average debt load for that group in 2013 was $73,211 and the median debt load (half above, half below) was $47,900.
The Employee Benefit Research Institute says that 20% of retirees die with no assets, except a home. The same survey said that 25% of people over 85 who die, leave no assets at all.
The good news is that in most cases, if the only name on the debt is yours — whether it be home, auto, credit card, etc. — your estate is responsible to pay and not your relatives, friends or other potential heirs. The exception is in nine community property states, where spouses may be responsible for paying the debt, even if their name is not on the account.
It is important to understand that any assets in the estate are part of the probate process and are used to pay off creditors. Some assets, however, are considered exempt from probate and thus are not considered part of the estate.
5 Estate Planning Tips
So, if you want your relatives, friends or someone else to have something when you die, there are a few things you can do to manage your money and see to it they have some inheritance.
- Update Beneficiaries – The first thing to do is fill out all beneficiary forms and make sure you name individuals as beneficiaries – not the estate – for things like life insurance, retirement accounts, accounts with payable-on-death (POD) or transfer on death (TOD) provisions and joint banking or real estate accounts. And be sure you have the right name as beneficiary on all accounts. You may have named someone 25 years ago, who is either no longer part of your life (ex-spouse?) or has died. If you do not fill out the forms, the money goes to the estate, not the individual.
- Check the Box – If there is a box on the beneficiary form that says ‘per stripes,’ be sure to check it. Checking that box ensures that the benefits pass to the lineal descendants of your beneficiary if he or she dies before you do.
- Beef up Your Life Insurance Policy – Money from a life insurance policy goes directly to the beneficiaries named on the policy and does not have to be used to pay any of the deceased person’s bills. The only exception is if the estate is named as the beneficiary. In that case, the money goes to the estate and is used to pay all debts.
- Put More Money in Your 401k or IRAs – The money from a 401k or IRA is treated the same way as money from a life insurance policy. It goes directly to the person or people named on a beneficiary form and not the estate. In most cases, there may be taxes on the money because it has grown tax-deferred, but at least it will go to your heirs and not your debts.
- Understand TOD and POD – A person can be named as beneficiary on a Transfer of Death (TOD) or Payable on Death (POD) account for bank accounts, investments, vehicles, and, in some states, property. It doesn’t cost anything to set up the accounts and the beneficiaries receive whatever is left to them, without having to go through probate. In most cases, there are taxes involved and the beneficiary must pay the taxes from their own account. It is worth noting that a TOD or POD override what is in the will and this could cause conflict.
Debt, Death and Debt Collectors
The last person you want to hear from after someone’s death is a debt collector, but don’t be surprised if that is one of the first phone calls you get.
And it almost certainly won’t be the last time you hear from them.
Collection agencies want to be the first in line when the assets of an estate are distributed, and they aren’t shy about their intentions. The Federal Trade Commission guidelines allow debt collectors to contact a spouse, executor or administrator of an estate, or anyone else authorized to pay the deceased person’s debts. Collection agencies also can contact relatives of the deceased to find out who is authorized to pay bills.
And they are not limited by any so-called “cooling off periods.” They can start calling the day after someone dies, though the guidelines say it can’t happen at unusual or inconvenient times or places.
Debt collectors must tell anyone they speak to about the debts that the money can only come from the deceased person’s estate.
It is helpful if the executor, or some family member, notifies the three major credit bureaus and requests that they put a “Deceased: Do not issue credit,” notice in the decedent’s file.
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