Typically, your estate is used to pay off your debts after you die. The estate is everything you owned at the time of your death. In some cases, people who share your debts and your heirs may also be stuck in a difficult situation because of these debts.
After your death, any debts are a problem for your heirs. Because they can decrease assets that you had planned to leave to heirs. Even worse, your relatives may become liable for your debts. Therefore, it may be beneficial to get a life insurance policy. While life insurances provide financial support to your beneficiaries, in addition, are also a guarantee for your debts that must be paid after you die.
As we mentioned before, your estate is responsible for all your debts after you die. After your death, the executor of your estate uses all your assets to clear your debts. Distributing your assets after paying your bills is called probate. If your wealth is not enough to pay off your debts, this condition is bad for creditors.
Which kind of debts can become other people’s burdens after you die?
Other people may responsible for some debts after your death:
Home Equity Loan
Typically, after your death, if someone inherits your house, he/she is responsible for the home equity loan.
When it comes to inheritance, A creditor can want your inheritor to repay the home equity loan immediately. If it is necessary, the house is sold. Besides, new homeowners can take over the payments on the home-equity loan by reconciling with lenders.
If you have an inheritor for your house or if there is a joint homeowner, he/she is responsible for mortgage payments after you die. However, creditors can’t force a joint owner to pay the mortgage immediately according to federal law.
If you were the only owner of your home, the mortgage can be paid off by using estate after you die. If the estate isn’t enough for payments, a family member who inherits the house can simply take over the mortgage payments.
Credit Cards Debts
If the estate isn’t enough to cover credit card balances after your death, As with mortgages or car loans, there is no tangible asset to guarantee credit card companies’ balances.
If you have a joint account with other people, they may be responsible for the unpaid bills. But, authorized users of a credit card are not responsible for paying the balance. If you are a citizen in community property states (see list next section), your husband/wife will be responsible for debts such as credit card debt which occurs after your marriage.
The executor can pay the car loan out of the estate. If the estate isn’t enough for all payments, the creditor can take back the car. However, If the estate can’t pay off the car loan, the inheritor can continue making payments and the lender is unlikely to take action.
Generally, The private student loan debt is paid off with the estate. However, if the estate doesn’t have assets to pay student loans lenders are out of luck. Because student loans are unsecured obligations.
Besides, there are two conditions for becoming responsible for student loan debt. If you are co-signer of private student loans, you have to repay student loan debt. In addition, in community property states, the student loan debt which was incurred during the marriage is paid off by the husband or wife after the death of one of the spouses.
Some creditors of private student loans such as Sallie Mae and Wells Fargo may forgive the debt upon death. If death occurs, federal student loans are discharged. If a student’s parent has a federal PLUS loan, it will be discharged upon the death of either the parent or student.
Which are circumstances where others are responsible after you die?
If one of the following conditions exists, spouses and others are liable to pay the debts:
- Having joint accounts
- Being a co-signatory for a loan
- Being a spouse in community property states ( California, Idaho, Arizona, New Mexico, Nevada, Texas, Louisiana, Washington, and Wisconsin )
Can debt collectors have the right to contact me?
You should know the rules of the Federal Trade Commission in this regard.
Debt collectors have the right to contact the deceased person’s family members or executor about debts according to Federal Trade Commission rules. But they can’t mislead relatives about whether they are responsible for paying the debts.
If you want, you can send a letter to a debt collector and you tell him/her to stop contacting you. You can learn more detailed information from the Federal Trade Commission.
Which assets aren’t responsible for debts after your death?
Your retirement accounts or life insurance benefits aren’t responsible to pay off your debts after you die. So, creditors can’t request the use of these assets for paying off debts. Beneficiaries can provide financial support from your retirement accounts or life insurance benefits after your death.
You may consider purchasing a life insurance policy to help your family. In this way, death benefits provided by your life insurance can provide some protection for your family if your estate is not enough to pay the debts you leave behind when you die. Also, life insurance payouts are usually not taxable.
You can prefer term life insurance policies. Because they are cheaper than permanent life insurance products. They also provide a death benefit for a set number of years.
Finally, we recommend you always keep your beneficiary info updated. Because if your beneficiaries are not alive, your life insurance payouts may be included in your estate. In this case, your creditors can go after this money.