It is said there is nothing certain in life but death and taxes. We may not know when we will die, but it does make financial sense to plan ahead in case something should happen unexpectedly.
Debts After Death
When individuals pass away still owing debts, there are a number of things that can happen depending on the individual’s specific situation. If you owe money to your creditors, any money left in your name will be used to pay off those debts before the funds will be provided to your heirs. Any assets you have will be considered for creditor payoff before distribution to heirs will be handled.
Assets are equally divided among all of your creditors. Balances are paid down equally until the funds run out. At that time, all remaining debts will be forgiven unless the debt is held jointly. Again, your assets include your property such as your home, vehicles, personal items, and the like which will be sold to cover the balances due to creditors.
According to StudentAid.gov, “if the deceased still has student loans to repay, it will be discharged as long as a family member provides a certified copy of the death certificate to the school (for a Federal Perkins Loan) or to the loan officer (for a Direct Loan or FFEL Program Loan.) If you are a parent PLUS loan borrower, then the loan may be discharged after you die, or if the student on whose behalf you obtained the loan dies.”
Federal student loans are more lenient than their private counterparts when it comes to the death of a loan holder, says the Wall Street Journal.
If you’ve co-signed on a car loan, apartment lease, or have a joint credit card, you’re still responsible for that debt if the other party dies. The exception to this is authorized users on credit cards. While co-account holders are liable for each others’ debts, authorized users are not.
Heirs May Lose Out
Heirs typically do not inherit the debts of another unless there is a financial connection between the individuals such as with a husband and wife. However if you inherit property or other assets (from the will) where debts are still owed, you may need to sell the inheritance in order to satisfy those debts and still keep your gift.
State laws govern what happens to your debt upon your death. While family members will not usually be responsible for a deceased one’s debts, there is a difference when you are in a financial relationship with the deceased. While most states offer immunity for widows or widowers, there are a handful of states known as “community property,” which you can find here.
If you have co-signed on a loan or credit card account, you are accepting full responsibility for the debts accrued in the event the other party does not pay. This includes the death of one of the parties no matter who racked up the debts.
Creditors are still very likely to pursue the balance owed regardless of the sensitivity of the situation. According to Robert Baker of Housing and Credit Counseling, “Some [creditors] will say anything to get survivors to send money. A lot of times a creditor doesn’t know the law, or a creditor’s trying to shake money out of people.”
Unfortunately there are people that become involved in scams and fraudulent activities after a loved one dies. Because not all people are aware of the laws concerning death and debts, they fall victim to claims of money owed. Death notices are made public online and in newspapers and as a result, scam artists can target family members easily.
Phone calls or letters requesting payment are often successful because those in mourning want to do right by their deceased loved one. They may feel pressured to pay the supposed debts without asking for proper documentation and proof.
Debt questions should be referred to the estate attorney and evidence of the debt owed should be requested before any money is exchanged.
Scheduling an appointment with an estate planning professional can be a wise idea, no matter what age you are. It can certainly help to have professional guidance when addressing your finances in life and after death.
Remember, there are many things to account for when you die — including the cost of your funeral expenses, paying off your creditor balances, and ensuring your loved ones are properly provided for after you are gone. You can also visit with an attorney to ensure you have a will created that outlines exactly what your wishes are concerning your assets and your loved ones.
Make Time for Talk
It is also vital that you talk with your family and loved ones about their financial situation as early as possible. It may not be a comfortable conversation, but it is certainly necessary.
Talk to your family about your financial situation, and what should happen if you die. If you feel you are having serious problems that you cannot resolve on your own, make a point to seek professional guidance. Getting your financial life in order now can go a long way to prevent problems for your family down the road.
While death is unavoidable, many people dismiss the importance of pre-planning for the inevitable. If you want to ensure your family is well cared for if and when something does happen to you, start making preparations on paper now and continue to update your will and estate documentation throughout the years.