Death disconnects you from most life aspects but not your debt. Although this may sound scary, making provisions in your debt when still alive can leave your family in a better financial position after breathing your last. Learn what happens to your debt after death below.
Repaying your debt while still alive should be a priority in your estate plan. Giving up on your debt does not mean it will disappear after you die. Rather, it will be passed on to your cosigner, spouse, and joint account holder, compromising their financial status if they have no repayment means.
Upon your death, your income, assets, and liabilities are established as a deceased estate. The deceased estate is conferred to the High Court, which appoints an executor to take charge of the property. In general, the executor identifies and pulls together your assets, liquidates liabilities to pay off the debt, and gives your heirs the remaining part of your property in proportions stated in your will. If you die without leaving a will, your property shall be shared based on the laws of intestate.
Who Attends to Your Debt After Your Death?
Your debt remains under the care of your estate, consisting of your assets, income, and liabilities after your death. Through the court order, the cosigner, who is someone you applied for the loan with, becomes responsible for paying off your debts. If you had a joint account, including the credit card that served the family, one remaining with the account is obligated to pay off the debt. In community property states, including Texas, New Mexico, Alaska, Louisiana, Washington D.C, Idaho, California, and Arizona, may require your spouse to repay some types of your debt. What’s more, careless estate executors may be held liable for the debts after failing to settle them before distributing the remaining assets to the heirs.
Types Of Debts and How They Are Handled After Your Death
Creditors handle their debts differently to recover their money after your death. Understanding types of debts and how they are handled can help you determine the insurance amount you need for your surviving family to be safe after lenders collect back everything. Here is how your creditor will handle your debt.
Creditors allow a certain time after your death to have their debts repaid. If their demands are not met within this time, they start submitting claims to the High court. This results in probate, a legal process involving collecting and distributing assets from your estate to settle the debts. For secured debts tied to specific assets, including the home, the property becomes the security for the loan. If you and your spouse took mortgage debt, your surviving partner assumes the responsibility for the debt after your death.
On other occasions, there may be no cosigner on the property loan, leaving no one with the obligation in the family. However, the family cannot inherit the home without clearing the debt. The lender will require mortgage payments and leave the home under family ownership upon completion of payment. If the surviving partner intends to sell the house, they may still be required to make payments until the homeownership is completely transferred to someone else. If mortgage debts are remaining, the amount from the sold house will pay them off. It becomes challenging if no one manages the mortgage debt after your death, allowing the bank to repossess the home and sell it to collect back its funds.
If you have outstanding federal student loans, chances are they will be discharged if you die. The same can also happen to PLUS loans, a form of federal loans your parent can take to pay for your undergraduate studies. However, discharge of these loans may happen if the borrower’s parent or the student passes away. Private student loans have different rules, and their discharge terms vary from one lender to another. Some lenders will discharge the debts after your death, while others will require repayment, which will now be a responsibility of your estate. If you involve a cosigner in the student loan, they will be obligated to repay what you owe.
Medical debts also live on after your death, requiring repayment through the collection agency or care provider. If your medical debt is small, the care provider may declare it uncollectable; hence, no one will be obligated for repayment. However, if the amount is huge, your estate will settle what you owe. The medical debt has no cosigner unless the patient is a child. In such a situation, the parent will be required to foot the bill after your death.
Car Loans are forms of secured debts tied to your car as the security for repayment. Upon your death, your family can allow the creditor to repossess the car if it is a burden to their budget. Also, they can sell it to collect funds for repaying the debt or keep the car and dedicate themselves to settling the auto loan you owed.
Credit Card Debt
A credit card debt is a form of unsecured debt that your joint account owner inherits after your death. Since the authorized user is different from the joint account owner, the former is not responsible for this debt. If your credit card accounts have no joint owner, the lender will recover the funds from your estate. However, if you die intestate or have no estate or asset, the credit card debt will be written off because your children or relatives will not be responsible for repaying this debt.
How to Protect Your Heirs
The greatest thing you can do is taking a life insurance policy if you entered any form of debt. If you have this cover and die, your family will get the death benefit as a beneficiary, which can keep them going if the creditors repossess their properties or assets. Life Insurance premiums are affordable to young people. Furthermore, there are insurance companies that offer the lowest rates on their life covers. Research on these companies and insure your life for the benefit of your family.
The Bottom Line
Death can knock at your door any moment, and it can be challenging if you die leaving unsettled debts behind. Although there might be people to manage your debts, it can be a burden if they have no repayment means. If you have any form of debt mentioned above, taking a life insurance policy can leave your family leading a normal life after your death. Find insurance companies that offer lower rates and insure your life for the benefit of your heirs.