When a loved one dies, especially after a long illness, family members often worry about handling debts after death.
Will they be responsible for paying any of these debts? Is there enough money in the bank to cover these debts? Or will the debts be forgiven after death?
This article talks about how different types of debts are handled during probate and which debts may continue to affect loved ones.
Are You Responsible for the Debts of a Deceased Relative?
It is the duty of the estate executor to pay outstanding debts from the deceased person's estate during the estate administration or probate process. Typically, heirs are not responsible for paying the debts of the deceased, regardless of what some debt collectors may want you to believe.
You may be responsible for repaying a debt if:
- You own any part of the debt
- You have received substantial benefits from the debt itself (as in the case of a loan used to pay your personal living expenses)
- You co-signed on a loan
You can read more about specific types of debts below.
How Are Debts Paid After Death?
Payment is made from the estate's assets. The assets available for a creditor to make a claim against may depend upon whether the deceased had a trust in place and the type of trust. A living trust (or revocable trust) does not protect assets from creditors.
If you have a will, your estate will go through probate. Your estate's executor will gather all of the assets of the estate, and will make an accounting of all debts, or liabilities.
Some debts may not be valid. For example, creditors may go after a deceased spouse's estate for debts of an ex-spouse. It's up to the executor to determine which debts are valid and which are not.
Creditors of secured debt have the ability to take possession of the item used to secure the debt, or they can receive payment from the estate. Creditors of unsecured debt have an interest in the estate.
Life Insurance Policy Death Benefits and Debt
Death benefits from a life insurance policy that doesn't have a named beneficiary will become part of the estate. This can be used to pay down debts. Bank accounts, investments, retirement accounts — these can all be used to pay secured and unsecured debt.
If there are not sufficient funds, the executor may sell some assets of the estate in order to pay creditors. Heirs and beneficiaries will receive their share after the debts of the estate have been paid.
If there are not enough assets to cover debts, the estate is considered “insolvent" and the heirs will receive nothing. But they will not be responsible for debts.
Are you a named beneficiary of a life insurance policy? Life insurance beneficiaries are not obligated to use the proceeds they receive from the policy to pay their loved one's debts after death.
Types of Debt: The Basics
There are common types of debt that most people will face in their lifetime:
- Medical debt
- Funeral expenses
- Credit card debt
- Personal loans
- Co-signers on debt
- Mortgage debt and liens
- Car loan
- Student loans
These types of debt are explored in greater detail below.
Often, the most expensive time in a person's life is their last few days of life in a hospital. It can be quite a shock to receive that last medical bill. Medical debt is not discharged after death. It becomes one of the liabilities of the estate.
Families may also be hit with an entirely unexpected medical debt after death: Medicaid estate recovery.
In 1993, the federal government mandated that states recover long-term care costs for Medicaid beneficiaries aged 55 and older. While a person is receiving Medicaid, they are allowed to possess a home, but once the person dies, Medicaid can seek repayment and can even force the sale of a home.
The cost of funeral and burial or cremation expenses is part of the debt of the estate unless the deceased prepaid for these expenses. Many funeral homes offer prepaid funeral plans.
Credit Card Debt
Credit card debts belong to the credit card account holder and should be paid from the estate. Executors can request credit card balances of the deceased's account.
Under a provision of the CARD Act, the issuer has 30 days to provide the balances and can't charge any penalty fees or interest if you or the estate pays off the balance within 30 days after it provides that information.
Relatives should not have to pay for their deceased family member's debts unless they are a joint account holder or an authorized user and the debt was theirs. However, those who live in community property states, where property and assets acquired during a marriage are considered jointly owned, may be liable for their spouse's debt.
Credit card companies are usually out of luck when there is not enough money in a decedent's estate to go around. Even so, creditors may attempt to collect. If you believe you are being harassed by an overzealous debt collector, contact the Consumer Financial Protection Bureau. It is essential to understand your rights under federal and state law.
The deceased may have taken a personal loan from a parent or family member or friend. That loan may or may not be a legally valid claim against the estate. Hopefully, the agreement and its terms were in writing. Verbal agreements can also be legally binding. If the executor has concerns, they may want to consult a probate attorney for legal advice.
Sometimes the decision to repay a personal loan may go beyond what is legally required for the sake of family relationships. Heirs may agree that the estate should pay back a loved one.
If the deceased made a personal loan to someone, that is a debt owed to the estate. It is the executor's job to collect on that debt.
Pledges / Promissory Notes
The deceased may have made a financial pledge — in writing or verbally. For example, they could have promised money to their church, a school capital campaign, or a charity. There is likely a written record of that pledge.
But is a deceased donor's pledge enforceable? Must the estate honor it? It depends on your state's laws, the nature of the contract, and a few other factors.
In California, a contract is not enforceable unless it has all three parts:
- An offer
- An acceptance
“Consideration" means some kind of benefit or mutual promise.
Of course, the deceased must also be competent when they make such a pledge. Gifts and pledges from elders with dementia, or made under the undue influence of another, can be challenged by the estate.
Verbal Pledges With No Evidence
What if the deceased promised to help with college expenses for a niece? Everyone in the family heard them say so. They said it for years. Their young relative was counting it.
Chances are that verbal expression is not a legally valid pledge. Heirs may agree amongst themselves that it should be honored by the estate, but an heir could also contest that decision in court.
On the other hand, some courts have enforced verbal promises of an inheritance. This occurs if the deceased person benefitted from the actions of the person who thought they were going to inherit. Did the niece clean her uncle's house every week because she thought he would pay for college? She might want to talk to a lawyer about probate litigation.
Responsibilities of a Co-Signer
Some types of loans, such as car loans, home mortgages, and student loans, may have a co-signer. Whether the deceased was the co-signer or a beneficiary was a co-signer, the extent of their liability will depend on the terms of the contract that they signed.
A probate lawyer can review the contract and provide legal advice.
Mortgage Debt and Liens
Similar to credit card debt, mortgage debt belongs to the borrower of the mortgage loan. If a spouse was named as a joint owner (a joint tenant with right of survivorship) on the mortgage, then they remain liable for the mortgage loan.
If the spouse is named on the deed as a "tenant in common," they are liable for the mortgage loan, but the estate and/or other heirs are also responsible. Learn more about homeownership interests after death.
Co-Signers Are Generally "Co-Borrowers"
In most cases, a co-signer on a mortgage is really a "co-borrower." The extent of their interest in the property depends on the deed. Even if they never lived there, they could be on the deed as a joint tenant or a tenant in common, in which case they are responsible for the mortgage.
Suppose the deceased was the cosigner? Is their estate on the hook if the primary mortgage holder fails to make a payment? It could be. Read the mortgage loan contract. The co-signer may be liable for the debt until the final payoff.
A note against a home also continues after the borrower's death. In order to stay in the home, the surviving spouse must continue to make payments on the note or sell the home to pay it off.
A lien is a legal claim against a property for an outstanding debt. It may be brought by a bank, by a tax authority, by a workman or contractor, or another type of creditor.
The lien stays with the property until it is paid, whether by the estate, by the new heir, or by the forced sale of the home.
A car loan is not forgiven upon death. It becomes the responsibility of the estate and any co-signer.
The estate can send a death certificate to the lender and pay off the full amount of the loan and pass the car along to the person who is designated to inherit it. If there is not enough money in the estate to pay off the loan, the designated heir can attempt to assume the car loan or can secure a new loan and pay off the old loan.
If the estate or the heir does not take over car payments, the car can be repossessed. At that point, the estate and any co-signer on the car loan can be held responsible for the “deficiency balance." That is, for the difference between what is owed on the car loan and what the car sold for after it was repossessed and resold. There will also be repossession fees.
Federal and Parent PLUS Student Loans
Student loan debt looms large for people of all ages. One tiny bit of good news for this type of debt: federal student loans are discharged upon death. The student's estate is not responsible to repay any remaining federal student loans.
A parent PLUS loan is discharged with the death of the student or the death of the parent responsible for the loan. An endorser or co-borrower on a student loan is also discharged from repayment.
Private Student Loans
Private student loans are another matter. Private lenders vary in how they handle student debt. Sallie Mae and a handful of other lenders discharge the debt upon death. Other lenders will require a parent to continue to pay on a parent-student loan. Talk to your lender to learn their terms.
If there was a co-signer on a private student loan, the co-signer is typically discharged from responsibility if a student dies.
Talk to an Attorney to Learn More About Debts After Death
Don't wait until a critical moment to figure out your estate plan. You should have a good grasp of the laws and how they'll impact your family should anything happen to you. Speak with an estate planning attorney in your area to learn more about life insurance policies, credit card debt, and more.