Creditors And Your Estate Plan
Have you ever wondered what happens to your debt or a family member's debt after death? The answer varies, which is why it’s crucial to ensure your estate plan is well-prepared. Proper handling of your debt can significantly impact the people you care about.
In some instances, your surviving heirs—such as children or parents—might be left responsible for your debt. However, with the right planning, your debt can be managed effectively or even eliminated when you pass away.
Understanding Debt After Death
The Federal Trade Commission explains that an individual's debt doesn't vanish upon death. Instead, the debt must be paid from the deceased's estate or by a co-creditor, which can be troubling for those left behind.
The handling of this debt varies. One function of the probate process is to allow creditors to claim against the deceased’s estate. Debts are settled before beneficiaries receive their inheritance. But what happens if there are no assets in the probate estate?
The Role of the Executor
When someone dies, an executor handles their affairs. This person could be someone chosen by the deceased if planned in advance, or appointed by the court if not. The executor initiates the probate process, during which the court validates any will and formally appoints the executor to administer the estate and distribute assets to loved ones.
During probate, the estate’s assets are used to pay outstanding debts, which generally include all assets except those with beneficiary designations, such as 401(k) plans and insurance policies. These assets pass directly to the named beneficiaries and are not part of the estate.
Handling Unsecured Debts
Unsecured debts, like credit card debts, are typically the last to be repaid from the estate. The estate first pays off secured debts, such as car and mortgage loans, followed by legal and administrative fees related to executing the will. Any remaining assets are then used to pay unsecured debts. If the estate lacks sufficient assets, creditors often have no choice but to accept the loss.
In some states, probate laws might allow creditors to clear debts by forcing the sale of the deceased's property. Creditors usually have a specific time frame to make claims against the estate, which varies by state.
Avoiding Probate
There are ways to avoid probate, such as establishing a revocable living trust. A trust, not the estate, owns the assets, so they don’t go through probate. However, creating a trust doesn’t necessarily protect assets from creditors if there’s debt. It can offer heirs more flexibility in negotiating debts. Creditors might still sue for full repayment, but they often prefer to settle due to the cost of litigation.
When Family Members Must Pay
Surviving family members usually don't have to pay the deceased's debt from their own money. Debts are either paid from the estate or extinguished if the estate lacks assets. However, there are exceptions:
Co-signing loans or credit cards: If someone co-signs a loan or credit card, they are responsible for the outstanding debt.
Jointly owned property: Jointly owned assets may require the surviving owner to pay off any related debt.
Community property states: In some states, the surviving spouse must pay off debts associated with community property.
State laws: Some states require the estate or family members to pay the deceased's healthcare costs. Executors may face fines if they don't follow probate laws correctly.
Steps to Take When Someone Dies With Debt
Understand Your Rights: Research your state’s probate process or hire a lawyer to help. States have specific requirements for creditors to make claims and for family members to declare the death publicly. It’s illegal for creditors to use unfair tactics to collect debts.
Collect Documents: Gather vital financial papers. If these are not readily available, request the deceased’s credit report to identify accounts in their name.
Cease Additional Spending: Stop any further spending on the deceased’s accounts and cancel recurring subscriptions to prevent complications with creditors.
Inform Creditors: Contact creditors to negotiate the debt and notify credit bureaus of the death. Have copies of the death certificate ready to share with creditors and insurance companies. Close all accounts in the deceased’s name and request a credit freeze.
Close The Estate: After settling debts, the executor can close the estate. The process depends on how assets and debts are managed, so professional advice is recommended.
Ensuring Your Family Isn’t Burdened
Proper estate planning ensures your debts are managed so your family isn’t left with financial burdens or forced into lengthy legal processes. By carefully planning your estate, you can protect your assets and ensure your loved ones receive the benefits you intend for them.
This article is a service of Zarda Law, S.C. We do not just draft documents; we ensure you make informed decisions about life and death, for yourself and the people you love. That's why we offer Legacy Planning Session, during which you will get financially organized and make all the best choices for the people you love. You can begin by scheduling a Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.
