Debts After Death
When a loved one dies, especially after a long illness, family members often worry about handling unpaid debts after death. Will they have to pay any of these debts after you die? Is there enough money in the bank to cover these debts? Or will the lenders forgive the debts 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?
The estate executor or personal representative must 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 person's debt
- You have received 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?
The executor of the estate pays debts from the estate's assets. The assets available for a creditor to make a claim against may depend on whether the deceased had a trust and the type of trust in place. A living trust (or revocable trust) does not protect assets from debt collection.
Your estate will go through probate court if you have a last will and testament. Your estate's executor will gather all 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 can take possession of the item used to secure the debt or 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 pay down debts. Bank accounts, investments, retirement accounts — these can all pay secured and unsecured debt.
If there are insufficient funds, the executor may sell some assets of the estate to pay creditors. Heirs and beneficiaries will receive their share after the executor pays the estate's debts.
If there are insufficient assets to cover debts, the estate is “insolvent," and the heirs will get 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
- Real estate debt, such as 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 the 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 encounter 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 may own a home, but once the person dies, Medicaid can seek repayment and can even force the sale of a home.
The funeral and burial or cremation expenses are part of the estate's debt 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 the estate should pay them. 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. It can't charge any penalty fees or interest if you or the estate pay off the balance within 30 days after it provides that information.
Relatives should not have to pay for their dead family member's debts unless they are a joint account holder or an authorized user and the debt was theirs. But those who live in community property states, where property and assets acquired during a marriage are jointly owned, may be liable for their spouse's debt.
Credit card companies are usually out of luck when there is insufficient money in a decedent's estate. Even so, creditors may attempt to collect. If you believe an overzealous debt collector is harassing you, contact the Consumer Financial Protection Bureau. Understand your rights under federal and state law.
The dead person may have taken a personal loan from a parent, family member, or friend. That loan may or may not have 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 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 among themselves that the estate should honor it, but an heir could also contest that decision in court.
But some courts have enforced verbal promises of inheritance. This occurs if the dead person benefitted from the actions of the person who thought they were going to inherit. Did the niece clean her uncle's house weekly 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 contract terms they signed.
A probate lawyer can review the contract and offer legal advice.
Mortgage Debt and Liens
Like credit card debt, mortgage debt belongs to the borrower of the mortgage loan. If a spouse was a joint owner (a joint tenant with the right of survivorship) on the mortgage, they remain liable for the mortgage loan.
If the spouse is on the deed as a "tenant in common," they are liable for the mortgage loan, but the estate and other heirs are also responsible. Learn more about homeownership interests after death.
Co-Signers Are Generally 'Co-Borrowers'
Usually, a co-signer on a mortgage is 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 pay? 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. 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. A bank, a tax authority, a workman or contractor, or another type of creditor may bring it.
The lien stays with the property until it is paid, whether by the estate, the new heir, or the forced sale of the home.
A car loan is not forgiven on 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 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 to 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 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 for repaying any remaining federal student loans.
A parent PLUS loan is discharged with the student's death or 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 force 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.
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