How does your death affect your debt?
Image Source: StockSnap.io
Because the last few months of our lives are typically the most costly when it comes to medical bills, when you or a loved on passes away, there is likely to be leftover debt. But what becomes of it? The short answer is that individual debt that belongs solely to the dead individual passes to the estate for payment, not the survivors, but creditors won’t always tell you that you don’t personally have to pay.
Death Triggers an Estate to Be Born
When someone dies, their debt and assets become part of their estate that’s created when they die. For those that are savvy and have done estate planning, there may be few assets to claim against the debt. For instance, when one partner is diagnosed with cancer, meeting with a planner to arrange for transfers or purchases of assets by their future survivors may be wise.
In the case in which the decedent owns property, such as an auto or home with equity, the creditors can pursue the estate for a share of the equity. The estate inherits the debt when the person dies, and the executor of the estate will have to sort through the debt and assets and make arrangements for the sale of assets to satisfy the debt, where possible. It’s typically complicated.
What If the Decedent Has No Assets?
If you and your spouse don’t own any assets or the assets are solely in your name when your spouse passes away, you can still expect debt collectors to come calling to try and collect on medical bills, credit card debt, and more. For an auto loan, the creditor can repossess the vehicle if it’s solely in your spouse’s name and you don’t pay the debt.
For unsecured debt, like medical bills and credit cards, so long as you weren’t a cosigner, you’re in the clear. If there are no assets and, therefore, no value in the estate, these creditors will have no recourse. They may still call and ask you to pay the debt, but you can simply tell them you can’t afford it and request that they stop calling (you’ll have to ask in writing, most likely), and they will go away eventually.
Life Insurance Is Not Attached to Debt
Even if your spouse had a life insurance policy that left you money as the beneficiary, that does not obligate you to pay the debts of your spouse. Be careful about listing yourself as financially responsible for someone’s debt on medical forms – that’s not a good idea – unless it’s a minor child and you’re required to list a responsible party. The life insurance proceeds you receive are not part of the bankruptcy estate.
Creditors will try and make you feel obligated to pay them back, but you should first think about your financial future. Loss is part of the credit issuing decision that lenders and card issuers calculate into their business, but if you give up some of the life insurance money to them for debt you don’t owe, you might find yourself hurting financially later. Consult an estate attorney as you’re making these decisions.
Planning Ahead Is the Best Strategy
A shocking number of Americans don’t have a will in place or plans for their finances in case of their death and for younger people, it’s not such a big deal. But once you’re married and have children, a little financial and estate planning can go a long way toward your peace of mind. Some things to consider include life insurance and mortgage insurance to pay off your home in case of your death.
Some things that may not be as wise is insurance offered by credit card issuers to pay off your debt in case of your death. Once you pass away, that debt dies with you unless you have a significant estate, so this may be a premium not worth paying. These are all things to discuss with an estate planning attorney. If you’ve been diagnosed with a terminal illness, it’s time to get your financial ducks in a row fast.
In some cases, we’ve handled bankruptcy cases in which the death of a spouse has caused financial stress for the surviving spouse because of joint debt that falls 100% on the surviving spouse to pay. If you’ve lost a loved one and are drowning in leftover debt that is your legal responsibility to pay, bankruptcy may be the solution you need.
Contact the Law Offices of John T. Orcutt today for a free North Carolina bankruptcy consultation. Call +1-919-646-2654 now for a free consultation at one of our locations in Raleigh, Durham, Fayetteville, Wilson, Greensboro, Garner or Wilmington.