Here’s what happens to debt when you die

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Debt usually doesn’t die when we do.

A number of factors determine what happens to the debt when you die, including whether someone co-signed the loan, whether the debtor had any assets at death, and what type of debt they held. Laws also vary from state to state.

Generally, debts must be repaid by your estate upon your death, if you have any assets. (We’ll cover co-signers, spouses, and joint accounts a bit later.)

For example: if you die with $ 100,000 in cash in the bank and $ 10,000 in credit card debt, that debt must be paid off before anyone receives an inheritance – creditors are the front line for property. a deceased person.

“Your executor or administrator – the person in charge of your estate – will pay off those debts with the assets left before your family receives anything,” said Carmen Rosas, a California-based estate attorney.

“Paying off those debts could mean just writing a check from a bank account or selling assets for cash to make those repayments.” These assets can include the person’s home, cars, or other valuables.

The executor of your estate must notify creditors, credit bureaus and banks of your death as soon as possible. By notifying these agencies early, there is a better chance that your family will prevent someone from stealing your identity for financial gain.

Your executor may also request a copy of your credit report, which will tell them exactly what debts you owed.

Creditors want – and expect – to be paid by your estate. They can file a lawsuit in probate court, which is the legal process that oversees the handling of your estate.

Since it may take some time to settle your financial affairs, creditors may agree to a settlement with your estate for less than the total amount of the debt.

“They’d rather have 40% or 50% now than have to deal with all the hassle and uncertainty of the wait,” said John O’Grady, a San Francisco-based estate attorney. “Creditors all want cash and they prefer immediate cash.”

If your assets don’t cover your debts, they usually go unpaid, according to the Federal Trade Commission.

Here’s what happens to different types of debt when you die.

What Happens To Debt When You Die

Co-signed loans and credit cards

If you have a co-signer on a loan, such as a student loan, that person is responsible for paying off the debt if you die. The same is true for a joint credit card.

“Once you’ve co-signed for any kind of financial obligation, you tell the bank that if the other person doesn’t pay, you’ll be 100% responsible,” said Linda Kerns, a lawyer in Philadelphia.

“My best advice for co-signing is that unless you are willing to pay 100% of the balance you are co-signing for, you shouldn’t do it,” she adds.

In some states, called community ownership states, it doesn’t matter whether your spouse is technically a co-signer or not – your assets are considered spouses. If one of the spouses dies, the other is responsible for repaying the remaining debts.

Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington State, and Wisconsin are community property states. Alaska gives parties the ability to make their assets the property of the community.

If there is no joint account holder and you do not live in a community property state, the credit card debt falls on your estate, which will use your assets to pay it off.

Student loans

If you borrow money from the federal government for your college education and you die, that debt is gone – the loan is automatically forgiven.

However, private student loans are not canceled in the event of death. The lender will try to collect your estate.

Mortgage

If you die and you have a mortgage, it doesn’t go away. If you are a co-owner of the house with a spouse, the responsibility for the mortgage payments now falls on him alone.

If you were the sole owner, your estate can sell your home to help pay off other debts. If all of your other debts are paid off and you have left the house to a family member, they will need to continue making payments to the bank or sell the house.

What if you have no assets?

If you die with debts and no assets (and no co-signer), the creditors are just out of luck.

“The best planning is to die with no assets,” O’Grady said. “Spend it, give it while you’re alive, enjoy it and let the people in your life enjoy it and die with nothing. “

Debt collectors can call family members after your death while trying to collect your debts – and they are authorized to do so by the Federal Trade Commission.

Debt collectors cannot, however, mislead your family members into believing that they are personally responsible for your debts after your death.

And the FTC says debt collectors can only call your spouse or the executor of your estate when they are trying to collect. They can call other family members, but only to help locate a spouse or the executor.

Sarah Kuta is a contributor to The Penny Hoarder.

This was originally posted on The Penny Hoarder, a personal finance website that empowers millions of readers nationwide to make smart decisions with their money through practical and inspiring advice, as well as to resources on how to earn, save and manage money.

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