Have you thought about what happens with debts after death? I know, that it is not usually the top priority at the moment, but the data shows it needs to be included in financial planning.
In the United States, a huge amount of debt does not always dissapear after a person passes away, actually, in some cases, it may have an immediate impact on family members.
About 55% of Americans think they will leave debts to a loved one when they pass away, according to Debt.com. And nearly half of them even anticipate that they will inherit financial obligations around $10,000-$30,000.
Not a really fun inheritance though.
Furthermore, over 37% of those surveyed claim to have taken on new debt following the death of a family member; which is a percentage has been rising in recent years.
Who pays the bills after death?
The probate process is the legal procedure used to manage a deceased person’s debts through their assets.
After paying bills and selling assets, the executor divides the earnings between the heirs.
Many debts can stay unpaid if the money left is not enough to cover all obligations. However, there are some important exceptions:
Credit card debts
There is no automatic cancellation of credit card balances. They have to be paid by the estate, and businesses can take legal action if it’s not taken care of.
Unless they were co-holders of the account, family members are not usually considered “personally liable.”
Although authorized users do not inherit the debt, the procedure may cause a delay in the asset distribution.
Mortgages and home equity loans
Home equity loans and mortgages are still in effect after death. Heirs have to continue making payments or refinance the loan in their names if they want to keep the property. And if not, then the lender might start the repossession procedure.
Auto loans
The lender retains rights to the vehicle until the loan is paid off. Heirs can assume the payments or return the car.
Between 25% and 40% of cars with remaining loans are repossessed after the borrower’s passing, according to studies from the consumer and financial sectors.
In the other situations: The car is sold to pay off the debt, the family keeps up the loan payments, or someone legally takes over the loan.
Medical debts
Before heirs receive an inheritance, these debts—which can be huge, especially in situations with long-term care or chronic illnesses—have to be settled.
However, if the money left wasn’t enough, the estate is responsible for paying any medical expenses made before the death.
Personal loans
Whether from banks or online, there are also paid from the estate. If the state is not enough, the creditor can file a claim (if they are supported by an asset) and keep the asset, but if they are no supported, that debt can be cancelled and the estate is not enough, then it gets cancelled.
Student loans
When a borrower passes away, federal student loans are usually cancelled. Private loans, on the other hand, are not forgiven that easy.
Unless the contract specifies something different, a co-signer has to keep paying it.
How to protect your loved ones from your debts
You can take preventative action if you know which debts continue to be active after death. The estate’s future burden can be reduced if you get rid off remaining debts and create a payment plan. Some options are:
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Debt consolidation; which merges multiple payments into one, normally with a reduced interest rate.
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Debt settlement or negotiation; which looks for agreements that allow you to pay less than what you actually own, especially for unsecured loans or credit cards.
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Structured payment plans; given by credit counseling organizations, that facilitate debt repayment over the course of a person’s lifetime.