What Happens to Debt After You Die?
May 19th, 2016 by Bunch & Brock
An alarmingly large number of Americans spend much of their adult lives in debt. Driven by mortgages, car loans, student loans, and credit cards, it’s been estimated that 80 percent of us are in debt. At least banks and creditors can’t follow us beyond the grave, right? Unfortunately, that depends.
When people die, their estate goes into probate. Part of that process involves their assets being used to pay their debts. Life insurance policies, pension plans, 401(k) plans, and other similar holdings are typically not considered part of the estate if a designated beneficiary is properly identified and cannot be used to settle the debts. However, you can bet that if someone dies with a large amount of debt, but also a lot of assets, those who are owed will be given their fair share if a probate claim is timely filed. While creditors generally have no recourse if there isn’t enough to go around, that may not stop them from trying. According to the Federal Trade Commission, collection agencies are allowed to contact a decedent’s family members in an attempt to find an authorized party, but are prohibited from misleading them into thinking they are liable for the debts.
After death, any names associated with the decedent (particularly a surviving spouse) may be contacted by the creditor and may need the assistance of an attorney to sort out the details. Authorized users of the card may not liable for the debt, but anyone who co-signed for the credit or held it as a joint applicant or co-borrower or guarantor is responsible. The same holds true for privately held student loans. However, federal student loans are discharged upon death.
If a person who is paying on a mortgage dies, the house will eventually be foreclosed on unless a co-owner or the beneficiary who inherited the house takes over the payments and makes arrangements satisfactory to the lender. The lender may seek immediate payment, but this again is an important situation where a lawyer’s advice and guidance could be invaluable. If the decedent had an outstanding home-equity loan, the lender has more rights than under a mortgage. The lender can force immediate repayment of the loan, which may require selling the house, but may also be willing to work with new owners. It all depends on the circumstances specific to the loan, the lender, the property, and the beneficiaries that inherited the house.
In the case of a vehicle that was not paid off by the decedent, the lender can repossess the vehicle that served as the security for the loan. However, the beneficiary that inherits the vehicle can take over the payments if the lender allows. Of course, a beneficiary may not want the vehicle, for any number of personal reasons, and may choose to allow the repossession.
Gifts given in anticipation of death can look suspect and, if they cause a decedent’s debts to exceed the estate’s assets, can be challenged by creditors. The length of the “look back” period varies from state to state, but creditors have the right to petition the probate court for reversal of any gifts made just before death.
While the simple answer is that most debt is personal and is not passed on to surviving family members, there are lots of details that can complicate the question. The Kentucky debt relief attorneys at Bunch & Brock can provide the necessary counsel and guidance for your situation, both to help you get out of it while you are able and to help you draft an estate plan that will best serve your family after you are gone. We know how challenging these issues can be, and we have assisted many people who were struggling with the very same matters. Let us put our knowledge and experience to work for you. We encourage you to contact our office by calling 859-254-5522 or filling out this online form.