We know that when a person dies it is their relatives who inherit their estate and wealth. But, when someone dies, who is responsible for their debt? Dealing with the debts of a deceased person is not exactly pleasant. Moreover, it is a topic that is not often discussed and, as a result, can lead to confusion and misunderstandings. In this article you will find a complete guide on what happens with the debts of a deceased person.
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Who is truly responsible for a debt when someone dies ?
Have you ever thought about who would pay your debts if you were gone? If this is the first time you have asked yourself, I understand. No one likes to be in debt. And, it’s even less pleasant to think about who might inherit your delinquent status.
What about your credit card debt? Your mortgage? What if you have joint debts or are co-signer on another? Do student loan debts survive? In this article we will answer what happens to each type of debt when a person dies. However, first, we will review some key concepts to fully understand this topic.
Who is responsible and Who inherits the debt of the person who dies?
73% of Americans die with debts. And, on average, when that happens, they owe about $62,000. That’s a lot, don’t you think? When a person dies and has debts, they are not immediately passed on to a family member or spouse. Before that, all debts that the person owns become the responsibility of their own estate. Let’s review below what is considered an estate and what is not.
What is considered an estate when a person dies?
- All of their assets, no matter how meager they are;
- Bank accounts;
- Financial holdings;
- Bonds, stocks or money market holdings;
- Direct investments;
- Real estate, property;
- Possessions such as automobiles, jewelry, technology, equipment;
- Collectibles such as art.
What is not considered an estate for probate purposes when a person dies?
- Life insurance policies;
- Retirement accounts;
- Individual retirement accounts;
- Some assets placed in certain trusts;
- Some joint property (this may vary, as it will depend on whether it is properly titled).
These assets, which are not considered part of the estate, are transferred outside the succession. This means that they go directly to the person designated as beneficiary by the decedent. Moreover, they are assets that are not subject to probate. And now for the obligatory question. When a person dies, who will be in charge of administering that estate? Their executor of estate or, also called, executor of probate.
Note: Read more about the probate process and see the difference between testate and intestate succession here. And if you need a New York probate lawyer, contact us!
What is an executor of the estate?
An executor of the estate is the person responsible for handling the will and estate after the person dies. It is, in particular, who will manage the decedent’s assets in order to pay the debts owed by the decedent.
- The executor is the person who manages the decedent’s will.
- He must act according to the wishes and interests of the deceased.
- Takes charge of his or her estate, i.e. all of his or her assets.
- Must make sure that all assets in the will are accounted for and that transfers of assets are made in the correct manner.
- Uses the assets of the decedent’s estate to pay his or her debts, including taxes.
- The executor can write checks from a bank account or sell property to get the money to pay debts.
- Any assets the executor uses to pay the decedent’s debts will be deducted from what the heirs will eventually receive.
How is an executor of an estate defined?
The executor can be anyone. A lawyer, family member or accountant. The only requirement to be an executor is to be over 18 years of age and not to have had any prior felony convictions. The executor can be appointed (check New York letters of administration) by the testator of the will, that is, the person who makes the will, or by the court when there was no prior appointment.
Note: Check here what is the difference between the executor and the administrator of the estate. Also, read our article and understand also the difference between executor and trustee.
What happens if the decedent’s estate is not enough to pay the debts?
There are times when the deceased person’s estate is not enough to pay the debts in full. And, in that case, the decedent’s family could be affected by the debts. If you are reading this and don’t want to leave debts to your family when you are gone, consider estate planning.
Note: Consult our estate planning attorneys in New York and avoid leaving debts to their relatives.
Who can inherit your debt?
Still wondering who is responsible for a debt when soemone dies? As we said before, the debts of the deceased will be, in the first place, the responsibility of the estate. It will be the executor who will administer and manage that estate in order to pay off the debts. And if the assets of the estate are not sufficient to pay the debts, they can be inherited. Below, see when you might be responsible for the debt of a family member or acquaintance.
Parties who could be responsible for a debt when someone dies:
- Co-signers on a bank or other financial institution loan.
- Co-owners or account holders.
- Spouses in community property states. Community property refers to assets that the couple acquired during the marriage. These are considered jointly owned by the couple. States where community property exists are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
- Individuals responsible for settling estate debt who did not comply with probate laws.
Note: Also read what happens if you have a joint account with your deceased parent.
What types of debt can be inherited? Let’s take a case-by-case look at the most common ones
#1 Mortgages and Home Equity Loans
If you are the sole owner of the property and the mortgage, the loan must be paid from your estate. If there is a third party inheriting the property, there are two ways. The home can be sold in order to pay off the debt or the inheritor can assume the debt and continue to make the payments.
Another option is for the executor to use the property as an asset to pay off the debt. In other words, sell the property before transferring it to the heirs, thus eliminating the debt burden at its root.
To keep in mind:
- When transferring the debt on a mortgaged property, creditors may request evidence to evaluate the financial status of the person inheriting the debt. In this way, lenders ensure that the new debtor has the ability to pay.
- In case the creditors do not see the financial solvency of the heir to the debt, they may request a refund.
- In case you are a co-signer of a mortgage of a deceased person you will be directly responsible for the debt. This is because you obtained the loan jointly with the deceased. And, consequently, that makes you just as much a debtor as the deceased person.
- On the other hand, those who are co-owners of the property and are named on the deed, but who did not co-sign the loan with the decedent, are not automatically liable for the debt. Although in this scenario the most common scenario is that the co-owner will want to take over the debt to prevent the lender from taking possession of the home as collateral.
- And if you have mortgage protection insurance, it can be used to repay mortgage loans in the event of death.
#2 Credit Card Debt
This is one of the most common debts that someone may be responsible for when a person dies: credit card debt. And the fact is that most people have credit card debt. Credit card debt is a type of unsecured debt. This means that if the estate is not sufficient to pay the balance owed, the financial institution, whether it is a bank or a commercial institution that issued the card, may not receive the payments. Put another way: this debt could die with the defaulter.
To keep in mind:
- If the credit card account is a joint account, the other account holder must settle the unpaid bills. This is because being a joint account, both people are equally liable for loans or purchases made.
- In case the credit card has authorized users, they are not responsible for paying the debt. For example, if you have a credit card and your child has access as an authorized user, the child will not be affected and the debt will not be transferred.
- And if your spouse dies and you live in community property states, you may be responsible for the debt. This is because your debts are shared.
#3 The Automobile Loan
The loan the deceased person took out to buy a car is usually repaid from the estate. Either by having money or by selling some other asset. This is because the car loan is a type of secured debt.
Being a secured debt means that in the event that the equity is not sufficient and the lender does not receive payment, the lender can repossess the car. Although, as with a home mortgage, if an heir wants to keep the car, they can inherit the debt and continue to make payments.
#4 Student Loans
Student loans are a type of unsecured debt. This means, just as with credit cards, lenders have no recourse for collateral in case the equity is not sufficient to pay off the debt.
To keep in mind:
- Although it is unsecured debt, if you are a co-signer on a private student loan that was taken out before November 20, 2018, you may be responsible for the remaining debt after someone dies.
- If you live in one of the community property states, you should know that the spouse is liable for the debt in the event it was initiated during the marriage
- Despite the above two points, there are some private student loan lenders who will forgive the debt after the student dies.
- And if the student loan is federal, it is automatically discharged upon death.
#5 Undisclosed Debts
It is important that during your lifetime you be as orderly as possible with your accounts. Have them all identified in a spreadsheet, notebook or whatever method suits you best. And if you don’t keep track, there are many ways to find out if you are in debt in the United States.
If the deceased was not an orderly person with his or her unpaid debts, it can happen that the executor finds a debt that he or she did not know about. To avoid this, an announcement is made in a local newspaper before beginning to liquidate the estate to pay the debts.
- The executor’s publication in the newspaper gives the decedent’s creditors time to file their claims.
- It is not the executor’s legal obligation to post a notice that the person is deceased. Failure to do so, however, could put the executor at risk if an unpaid creditor were to come forward. And if this happens, he or she may have to pay the debt out of his or her own pocket.
- Once the notice is published, it takes about two months for creditors or lenders to come forward.
The dreaded and hated debt collectors. What can they do and how far can they go when the person who owes them dies? When a loved one dies, friends and family want to say goodbye, and the last thing they want to do is encounter a debt collector who is asking them to pay the debt.
- As we noted above, the deceased person’s debts are paid out of the deceased person’s estate. Therefore, there is not much the family can do at first.
- According to the Federal Trade Commission (FTC), the nation’s consumer protection agency, families are generally not obligated to pay their loved one’s debts.
- And, family members and all consumers are protected by the Fair Debt Collection Practices Act (FDCPA). This law prohibits debt collectors from using unfair, abusive or deceptive practices in attempting to collect a debt.
What can creditors do once you die?
Even during your lifetime, debts are a constant problem and worry. Especially when they are up to your neck and you don’t know how to get out of them properly. But beware! Debts can still be a problem after you are gone. That’s right, because if they are a problem for you now, they can be a problem for your loved ones later.
What’s more, debts could take away your family legacy. All that stuff you’ve been planning to pass on to your children or grandchildren.
This is the sequence once the person dies:
- Once the person dies, by law the creditors must be notified. Whoever notifies them may be a family member or, alternatively, the executor.
- After being notified, creditors or lenders have a certain period of time to file a claim against the decedent’s estate. In general, the time period ranges from 3 to 6 months after the date of death and will depend on the state.
However, keep in mind that:
- Creditors cannot touch all of your assets. For example, life insurance is off limits, as are retirement accounts and the contents of a living trust.
- It is illegal for a creditor or lender to borrow money directly from family members to pay debts. This will only be legal if that family member is a co-signer or is legally responsible for the amount owed.
Note: Also read about the steps to contest a will. Discuss what inheritance and gift taxes are in place, and also what inheritance tax is in place in New York State.
Why take out life insurance?
Thinking about what will happen when you are gone is sad, but it can be very helpful to your family. One way to secure a future for your loved ones is by taking out life insurance or writing your policy in trust.
What is a trust? It is a legal process that allows the owner of a life insurance policy to turn it over to a group of trusted individuals who take care of it. And, when the settlor (owner of the policy) is gone, the trustees (who are the ones left in charge of the policy) will transfer it to one of the beneficiaries.
Pros of having an escrow policy:
- Ensures faster payout
- No need for probate
- The policy is outside the estate because it will not be considered an asset if you have debts at death.
- Reduces your inheritance tax liability
Note: Review the difference between a trust and a will. And see what happens when life insurance is left without a beneficiary.
Why hire the attorneys at Ortiz & Ortiz?
Being organized with your accounts so as not to leave debts to your family and loved ones is the ideal situation. But if you already have debts and want to make sure you don’t pass those problems on to those who succeed you when you are gone, setting up a trust is an excellent alternative. In this article we have already given you an overview of what happens with each type of debt, when it is inherited and when it is not.
Do you still need more info on what happens when someone dies and who will be responsible for their debt? Our New York trust lawyers are ready to analyze your situation and help you leave your estate organized:
- They will analyze your current financial situation.
- Advise you on how to organize your estate so that you do not pass on your debts to their families and loved ones.
- They will help you set up your trust to protect their relatives after you are gone.
For these and other services, contact us today – we look forward to hearing from you!