WORK-LIFE BALANCE / DEC. 03, 2015
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What Happens to Your Debt if You Die?

Debt: the bane to anyone’s existence. With interest rates as low as they are, many consumers have fallen into the bad debt trap by thinking they can cover these debts because the servicing payments are minuscule. Therefore, consumers are taking out home equities, lines of credit and other forms of debt. It’s a dangerous path for any consumer if some unforeseen event happens. Like a death. 

See Also: U.S. Student Loan Debt Turning Into Fiscal Crisis for Millennials  

If you’re like the average American consumer then you likely have more than $16,000 in credit card debt, $32,000 in student loan debt and $155,000 in mortgage debt. In total, the United States faces close to $12 trillion in consumer debt (this is in addition to the $20 trillion the federal government must contend with). That’s a lot of red, and it’s becoming harder to tackle. 

Here’s a question: what happens to your debt when you die?  

That’s a good question. A lot of myths have been passed along, such as a great-great-great aunt died with $100,000 in debt so now you’ll have to cover this amount of money. Or, because you’re the only surviving child in the family, your father’s gambling debts have to be covered somehow. This is all untrue. 

Many families are concerned that the death of a loved one will translate into their debts being placed into their legal responsibility. That’s not necessarily right. Or, most of us think that it’s absorbed by the financial institutions, creditors and so on. That’s also not exactly correct. It all depends upon the situation, legalities and assets compared to liabilities. 

First, it depends on the type of debt you have. Second, it depends if you have an estate or not. Third, debt does actually go away and vanishes into the night. Simply put: your debt essentially belongs to you and nobody else. It doesn’t get placed into the laps of family members. 

Covering the Basics 

Upon your death, the estate owes the debt. This means that if there are enough assets in your estate to cover the remaining debts then the executor, an individual who is in charge of paying the creditors, is required to sell these assets to pay the creditors who filed a claim after your passing. If your assets do not cover the remaining debt then this debt perishes, and creditors have no other alternative but to write off the outstanding unpaid debts. 

Debt collectors cannot tap into financial accounts. For instance, debt collectors are legally permitted to take money from brokerage accounts, insurance, pension plans or 401(k)s because they do not go through the probate process. With that being said, what is safe or unsafe from debt collectors does vary by country or state/province. So be sure to discuss this with an attorney. 

Most consumers have credit cards, student loans and/or automobile loans in their names. When you pass away, the outstanding balances will be paid during the probate ordeal. It should be noted, however, that if a spouse or any other family member or friend had co-signed a specific credit source then they will be legally responsible to repay the debt (unless you have some sort of insurance). 

It should also be noted, though, that authorized users on credit cards will not be responsible for debts and interest fees. 

When it comes to student loans, however, if a student borrower passes away then the loan will be immediately canceled and the debt will be discharged by the federal government. The same does not apply to private student loans, and the debt will likely be passed onto the co-signer. 

But let’s take a look at one of the biggest debts you’ll leave behind in the event of your death: 

A Mortgage on Your Home

Let’s get one thing out of the way: your mortgage debt is attached to your house and not to you or your significant other. If you pass away and there are zero funds available to cover the mortgage then the mortgage is shackled to the home. However, the mortgage must be paid off so refinancing or sales are options. 

What about home equity line of credit? Again, the executor must sell the assets to pay off this line of credit. This could consist of selling the home. 

"Spouses don’t marry each other’s debts – each individual is responsible for his or her debt,” Bankruptcy trustee Andy Fisher of Farber Financial Group told the Globe and Mail. “And as for kids, they don’t inherit their parents’ debt.” 

Since mortgages are an important tool in the arsenal of insurance companies, these companies sell mortgage insurance, and many of the major financial institutions understand this. Many homeowners are sold mortgage insurance, but financial experts concur that term life insurance is a much better option. 

One of the reasons why term life insurance is a better alternative is because you can select your own beneficiary. With mortgage insurance, the beneficiary is the lender. 

Moreover, the term life insurance can help cover funeral costs, establishing an educational savings plan for your children, replacing an income for a family member and adding to a group life insurance coverage work plan in the event of a downsizing or change in jobs. 

A Financial Plan to Leave Behind 

No matter what age you are, you should always create some sort of plan for your finances upon your death. Whether you know you’re dying from an untreatable illness or your death is a sudden one, a legacy plan can clear up much of the headaches and rid the burden applied to those you’ve left behind. 

Here are several things to do to ensure your family and loved ones are taken care of: 

  • Do not live beyond your means and start to pay off your debt. 
  • Create a will that lists your assets and liabilities. 
  • Give instructions to your executor. 
  • Ensure you have enough money available for your family. 
  • Speak with your branch manager to determine if everything will be ready for your family to take out the necessary money from your bank account. 

See Also: How to Calculate Your Debt to Income Ratio 

Some of us say in jest that if we’re single and we know we’re dying ahead of time then it’s best to just take out as much credit as you can and go out and have a good time. Since you have zero responsibilities then what’s stopping you? Aside from ethics and morals, maxing out your credit cards for trips to Paris, Venice or New York City before your death can help you cross off some stuff on your bucket list. 

For years, we have thought that our debt will live with us forever, even into the afterlife. Indeed, the debt, or at least a part of it, will be paid off with your current assets. If you have very little assets then...oh well. You’re dead? Who cares? 

What did you think happened to your debt if you died tomorrow? Let us know in the comments section below.

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