It’s inevitable, we’re all going to die. And when we do, we will most likely have some sort of debt. Some examples of things we might owe include common everyday bills such as rent and utilities, all the way to extraordinary bills like one you might receive after a long-term hospital stay. Unfortunately, for some families, the discovery is much, much worse. The deceased person could have had a secret gambling problem — or even a very large credit card balance. According to Debt.org, “73 percent of Americans are likely to die with debt.”1
As we are all aware, creditors are entitled to payment of these debts, regardless of someone passing or not. Some situations are easier to navigate than others, however. As an example, when it comes to mortgages, the debt needs paid. This can be accomplished by the heir covering the debt, or selling the property. Credit card debt and student loans get a little more complicated. If you’re concerned about incurring debt after a family member’s death, or if you’re worried how your debt could impact your heirs, here are some things you should know.
Estate Planning: An Overview
Regardless of value, once you have passed, your assets become your estate. Probate is the dividing up of debt and responsibility after your death. Creditors have between three and nine months to make a claim against the estate, depending on where you live. Because of this, you should familiarize yourself with your state’s estate laws. This will make you well aware of which rules are applicable to you.
Debt After Death: What You Should Know
1. Choose a beneficiary.
If you or your loved one has designated a beneficiary for each account — such as your life insurance policy and 401(k) — unsecured creditors typically cannot collect any money from these accounts. However, if beneficiaries were not determined before the death, the funds would then go to the estate, which creditors could go after.2 Make sure to review your beneficiary designations if you have had a major change in your life, such as marriage, divorce or birth of a child.2 Make sure to review your beneficiary designations if you have had a major change in your life, such as marriage, divorce or birth of a child.
2. Think before you sign.
If you signed a joint application for a credit card, you are liable to repay that balance if the other party passes. This is true even if you didn’t contribute to the credit card balance at all. Don’t confuse this with being an authorized user, which has different rules. Depending on the state you live in, you may not have to pay a balance left on a card where you’re named an authorized user. If there is little to no money in the estate and the owner of the credit card passes, make sure to avoid using the credit card as this could be viewed as fraud, which further complicates the whole situation.
3. Marriage matters.
If your spouse passes, you’re legally required to pay any joint tax owed to the state and federal government. In certain states, you must abide by community property laws that make you — the surviving spouse — in charge of paying off any debt your partner acquired while you were married. However, in other states, you may only be responsible for a select amount of debt, such as medical bills. Make sure you know the rules of your state so you can best protect yourself.