Losing a loved one is never easy, and it’s only made harder when you’re left wondering how to deal with the debt they left behind. Studies show that more people are entering retirement with debt, increasing the likelihood that they’ll be leaving some of it behind when they pass away. But will you, as their spouse or next-of-kin, be held responsible for their debt? Well…it depends.
What Happens to Debt After Death
When your loved one passes away, control of their assets or “estate” is passed on to their executor. The executor is tasked with managing the estate (money, property, etc.) and ensuring that all of the deceased’s debts have been paid off. Once the debts have been attended to, whatever’s left over is passed on to the beneficiaries named in their will.
That said, it is possible that your loved one’s estate might have enough funds to pay off the debts in full. In this scenario, the debts are ranked and subsequently paid for in order of priority. Whatever is left unpaid is then written off by the creditors, and that’s typically the end of it. However, there are a few situations in which the deceased’s debt could pass on to you.
In the event that you were a joint account holder or co-signer on the deceased’s debt, then the responsibility to pay the money back will pass on to you. This is typically the case for unsecured debts such as credit cards, personal loans and student loans. Secured debts such as mortgages and auto loans will also pass on to co-signers, but it’s important to note that the federal government has made it illegal for lenders to accelerate loan balances, meaning they are not allowed to make the remaining balances due immediately following the borrower’s passing.
Debt could also pass on to you if the deceased was your spouse and you live in a community property state, (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). In these states, debt taken on during a marriage can be considered community (or shared) property, even if it was strictly in your loved one’s name. You may want to consult legal counsel if this is the case where you live.
How to Avoid Debt Inheritance
If you’re concerned about inheriting your loved one’s debt, there are some preventative measures you can take to soften the blow. You may want to talk to your loved one about investing in some form of life insurance. This could help to cover the costs of their debts and might even help to pay off other expenses. Keep in mind however that age and medical conditions can make it harder to qualify for a policy, so it’s better to acquire insurance sooner rather than later.
Alternatively, you could encourage your loved one to adopt better financial habits. Things like building a budget and living a more frugal lifestyle can help them free up money to pay down their debts. The habits they pick up could also help them stay out of debt in the future.
Knowing when you are and aren’t responsible for debts left behind from a loved one can help keep you from being taken advantage of by unethical collection agencies. In the event that you find yourself receiving unwarranted calls from a debt collection agency after the death of a loved one, you may want to consider consulting with an attorney or writing a letter (via certified mail) to that agency stating that you no longer wish to be contacted. It’s always important to know your rights and to keep yourself protected.
Dealing with the passing of someone you care about is hard enough without the added burden of debt. However, knowing which debt you may or may not be held accountable for can help you and your loved one plan ahead. Get together and go over all accounts, and look at your credit reports together as well – you can get your credit reports for free every year from each of the three credit reporting agencies and you can get a free monthly credit report summary from Credit.com. If you’re worried about inheriting debt from a loved one, get familiar with everything that’s owed and discuss your options today.
More on Managing Debt:
- The Credit.com Debt Management Learning Center
- How to Pay Off Credit Card Debt
- Top 10 Debt Collection Rights