Debt After Death: Can Your Creditors Haunt Your Loved Ones?

Although an uncomfortable topic for many people, it is never a bad idea to consider what will happen after you pass and to begin planning for it.  For most people, this consideration is limited to what will happen to their assets after they die.  What many people fail to consider is what will happen to their debt, but this requires just as much consideration since your debt can have a significant effect on what assets will remain in your estate for your beneficiaries.

There are several factors that determine what happens to your debt after you die.  The two most important factors to consider are the person or people who applied for the debt and the state in which you live.  In most cases, if you have debt at the time of your death, assets held in your estate will be used to pay off the debt.  If the estate goes through probate, your administrator or executor will look at your assets and debts and determine in what order bills should be paid.  In the case of secured debt, if the assets do not cover the debt, the property may be sold or repossessed to cover it.  Remaining assets will be distributed to heirs based upon your will or state law if you do not have a will.  If there is not enough money in the estate to cover the bills, the credit card companies and other lenders will end up writing off the unpaid debt.  Children, friends, or relatives generally cannot inherit debt, and a creditor usually cannot legally force someone else to pay.

There are two situations where your debt may pass to another person.  If the account was a joint account that was shared with another person such as a spouse or business partner, that person would be legally responsible for paying off the debt along with or instead of your estate.  This applies to anyone who signed the application, but is not applicable to authorized credit card users who had charging privileges but did not apply for the credit originally.  The second situation occurs in states that employ community property laws.  They include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  Normally, assets accumulated during a marriage are considered joint property in community property states, and in some cases, so are debts; therefore, depending on the laws in each state, the surviving spouse may be responsible for the debt of their deceased partner even if they held a separate account.

After a death it is important that all creditors are notified of the account holder’s passing.  In most cases, the person handling the estate will be responsible for notifying creditors and providing copies of the death certificate. The Credit CARD Act of 2009 requires credit card issuers to stop tacking on fees and penalties during the time the estate is being settled.  Without being notified, the creditors have no way of knowing about a death and will continue to pile on fees and penalties for delinquent payments; thereby further depleting the estate and reducing the inheritance of the beneficiaries.

It is important to note that some of your assets may be protected from your creditors and pass straight to your beneficiaries.  For instances, items such as IRAs, 401(k)s, and insurance, do not go through probate and typically, pass to whomever has been named as a beneficiary.  In many cases, these assets are not considered part of the estate, and depending on the laws in your state, these assets cannot be touched by your creditors.  This is particularly true for 401(k)s since they are governed by federal law which gives them protection from your creditors.  Additionally, many states allow a house to pass from one spouse to another after a death without letting creditors intervene.

This is one area where sitting down with an estate lawyer in your state may be beneficial to ensure your estate is handled properly and that any assets that can be protected from your creditors are in fact protected.  Additionally, for older individuals who are concerned about their credit card debt eating up their estate and taking assets from their loved ones, you may want to consult with a bankruptcy attorney in your state to see if you can have those debts wiped out to help preserve your estate for the people you care about.  For additional information regarding estate planning or bankruptcy, contact the Law Office of Suzanne Szymoniak.

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Filed under Bankruptcy Advice, Estate Planning

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