Coping with a loss is difficult enough without added financial stress. Yet, who handles debt after a loved one passes? Here’s what you need to know.
Managing the loss of a loved one is difficult enough without having added financial stress.
However, many people still wonder who handles debt after a loved one passes.
The thought of having to take on more financial responsibility—mortgage, credit card bills, unpaid loans—can distract you from the actual grieving process, and for many families it may be impossible to take on even more debt.
With that in mind, we're here to help you understand how debt works once someone passes away, so you can begin to prepare you and your family's financial estates in advance.
Can Creditors Pursue You for a Deceased Relative's Debt?
After the initial wave of grief, a second wave usually follows - a wave of questions that usually focuses on who pays for what.
To settle debts, creditors are entitled to payment1 from the decedent's estate—real and personal property they owned at the time of their passing.
Yet, you may be wondering who handles debt if their collected assets don't cover everything?
The answer to this depends on a number of elements, such as:
- The laws of your state.
- Your relationship to the decedent.
- What documents you've signed.
Creditors can expect you to pay, but only under certain circumstances. As a result, it's essential to understand exactly where and when you might be responsible financially.
When Are You Responsible for a Loved One's Debt?
As mentioned above, there are certain circumstances when a creditor can attempt to collect from you to pay off debt.
However, these are very specific situations, such as:
- If you co-signed on any debt such as an auto loan
- If you are a joint account holder2
If you're like most people, medical expenses may also be an enormous worry. However, when it comes to who handles that debt, medical expenses fall in a unique category.
Depending on the state in which you live, you may be responsible for paying a parent's outstanding medical bills. Spouses, on the other hand, are liable for any medical debt accrued, no matter their state.
Getting to know your state's law3 is vital in finding out how your relationship with the deceased may impact your responsibilities, as well as what various documents or agreements you've signed over the years can affect what debt you ultimately owe.
What Protections Are Available to You?
Unsurprisingly, creditors may try to force you into paying a debt for which you are not liable. Knowing where you stand can help give you the confidence needed to deal with aggressive collectors.
For example, your spouse's pre-marriage debt is not your responsibility.
Furthermore, to understand who handles debt after loved ones pass, it's essential to know the type of debt they incurred—secured or unsecured.
Secured debt is guaranteed by collateral such as a mortgage or an auto loan. Basically, the lender can "take back" the home or vehicle by foreclosure or repossession. Keep in mind, secured debt is paid out of your loved one's estate.
Unsecured debt is not guaranteed by any underlying asset such as credit cards or utility bills, and as such, creditors cannot collect from the following:
- Life insurance policy payments
- Pay-on-death bank or brokerage accounts
- Jointly held property that passes directly to the surviving owner
- Retirement plans such as 401(k)s and IRAs that have named beneficiaries
However, for these protections to be in place, the decedent needs to have declared a beneficiary for each account. For example, if your life insurance policy has no beneficiary for the deceased, then those funds can be sought after by collections agencies.
Adding to that, children are not responsible for their parents unsecured debt, so be sure to be on the lookout if someone tries to collect on mom's old credit card payments.
How Do You Move Forward?
Managing debt can be daunting in itself. But especially if it's not even yours. Knowing who handles debt after loved ones pass will lift loads of anxiety.
To embrace this peace of mind, be sure to do your homework. Understand what responsibilities you have based on your relationship to your loved one. Know where you stand in terms of your state's laws. And, be aware of the documents you've signed.
Although creditors may attempt to coerce you, let your informed stance do the talking. However, the best protection is likely to be sure you and your family are adequately covered ahead of time. We can help you protect your family, guiding you through a variety of life insurance options. Contact us today to learn more and speak to a licensed insurance agent.
This information is general in nature, may be subject to change, and does not constitute legal, tax or accounting advice from any company, its employees, financial professionals or other representatives. Applicable laws and regulations are complex and subject to change. Any tax statements in this material are not intended to suggest the avoidance of U.S. federal, state or local tax penalties. For advice concerning your individual circumstances, consult a professional attorney, tax advisor or accountant.