Debt and Death: What Happens?
What happens to your debts after you die depend on various factors: what type of debt is it; what is the marital status; was there a co-signer; is the state of residence a “community property” state; and the specifics of the estate left behind. Dealing with debt at any time can be stressful. Handling the administrative details during a time of grief adds pressure to an already stressful situation. What happens to debt is a big question impacting families and businesses after a death.
Today, let’s address what happens to bills after someone dies.
- Are Family, Friends or Heirs Responsible For Debts?
When you take out a credit card in your name, you’re agreeing to repay whatever you borrow. Whether you’re alive or dead, that obligation doesn’t extend to your family, friends or, in most cases, even your spouse.
Generally, while your heirs can inherit your worldly possessions, they don’t inherit your credit card balances, unless someone was on the account (join account holder). Creditors may try to collect debt in ALL cases. Be prepared.
- Direct Creditors to the Executor
Even when heirs aren’t responsible for debts after a death, the obligation of notification and follow-up falls to the Executor of an estate.
When a person dies, their estate is born. That estate will have someone, known as the executor or administrator, who will be designated by the will and affirmed by a court to handle all financial issues of the deceased, including their debts.
If you’re not in charge of an estate and get a debt collection request, direct the caller to the executor, then tell the caller you don’t want to be contacted about that debt again.
- Notify Creditors and Credit Bureaus
The executor of the estate should notify creditors as soon as possible of the death. They should also notify the big three credit reporting agencies – Experian, Equifax and TransUnion – and request the account be flagged with the statement “Deceased: Do not issue credit.” This will help prevent an all-too-common problem – identity theft of the dead.
The executor should also request a copy of the deceased’s credit report. This is the best way to find out exactly what debts were outstanding and contact of the Credit Bureaus to notify them of death to minimize the risk of identity theft. Sadly, this is a problem, as hackers creatively seek “prey” at this sensitive time. You may wish to send certified letters when corresponding with credit bureaus or individual companies to keep track of all correspondence for your records.
- Find Out Who’s Responsible
As mentioned above, people who request credit together are equally responsible for the entire debt. The same is true with a co-signer, who essentially guarantees the debt of the borrower. If the borrower dies, the co-signer becomes liable.
Authorized signers or additional card holders on credit card accounts, however, aren’t always liable. Check the terms and conditions for the specific account to determine who is responsible.
- Stop Using Credit Accounts
If you are an authorized user on a credit card account, it’s best to discontinue use of the credit card after the main cardholder dies. Because you’re not liable for the debt, this could be considered fraud. Check with the account to ask how a new card may be issued based upon your personal data, if desired.
- Don’t Split Up All the Belongings Yet
It’s natural to think that you should immediately start giving personal belongings like antiques and jewelry away. It’s a good idea to wait until after the Estate has settled its debts before distributing assets. Assets are used to settle debts and if given out before settlement, heirs may become responsible for debt.
- Ask Creditors for Help
If a surviving spouse is a joint account holder on the deceased’s credit card and is having trouble paying the bills, that person may be able to work something out with creditors. Contact the creditors and ask for options to give you time to get organized.
- Community Property States Are Different
If you live in a community property state, forget what you read in No. 1 above. Your rules are different. In a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and, if you choose it, Alaska) one spouse can be liable for the debts of another, even if they didn’t agree to them or even know about them. So in a community property state you may be on the hook for the credit card debt of a deceased spouse.
- If An Estate Can’t Pay, the Lenders Lose
Sometimes the estate has more debts than assets to pay them. If no one else can be found responsible for the debt, creditors will be forced to write it off.
- Student Loans
With student loans, the type of loan is key. Federal student loans and Parent PLUS loans may be canceled when the borrower dies. Private student lenders, however, may hold any cosigner responsible for outstanding debt.
- Business Debt
Does the business have a written succession plan? If not, the business structure dictates how the debt is handled. For a Sole Proprietor, the business and person are one, thus the debt is the person’s debt. In Corporations, LLC’s or Partnerships, the debt and the person are more separated and thus depend on the written agreements and/or succession plans to dictate how things are handled. Seek outside counsel to help.
There is so much to do after a loss. Know there is administrative “stuff” to handle to ensure day to day life can go on. Seek help from attorneys and other advisors to help sort out the various types of tasks required of us.
Contingency planning at home and work can be a godsend to anyone. The Living Planner proactively helps you assess your situation in business and home. What is your risk? Your plan? Are you ready to be ready?
Contact us to learn more about how we work with individuals, business owners and employees via Email or online @ The Living Planner #LifePlanningSimplified #CareForPeopleCareForBusiness