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Life After Debts: Who Will Inherit Your Debts When You Die?
Release Date:
2017-01-18
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Life After Debts: Who Will Inherit Your Debts When You Die?

You have likely heard some variation of the following line before:

‘The only two certainties in life are death and taxes.’

Today? I would like to suggest a third: debt.

You see, debt is increasingly becoming the unspoken third in this list. Of these? The former is unavoidable, the second is an annoyance, and the latter can be a heavy burden you end up carrying at one point or another, whether you are financially responsible or not.

Debt is not just a symptom of the financially irresponsible. The truth is, debt will almost certainly weigh you down at some point in your life, whether it is a hefty student loan for studies or college, a mortgage for a home, or a loan for the new set of wheels sitting in the driveway. Depressing as it may be, debt is seemingly another in a growing list of life is inevitable frustrations.

There is a bigger, often unasked question here though: what happens when that life comes to an end? It is all too easy to wave this away as a ‘someday’ problem. A problem for the older generation, perhaps. I can hear you now. ‘I have plenty of time!’, you say. But that is not necessarily true (this got morbid real quick!). We all hope we have the privilege to live a long and healthy life, but this is not always the case.

Whether you are young or young at heart, you need to know who will be shouldering the weight of your debts should the worst come to pass. In doing so? You will help to prepare today for the financial burdens that your friends and family could face tomorrow, and at a time where they will undoubtedly be struggling, it is a small gesture that can go a long way.

Read on as we look at who, exactly, ends up with your debts when you pass away, what they’ll have to pay and, more importantly, how you can best prepare for it before the time comes.



The Simple Explanation

What happens to your debts when you die? That is the question. The answer? It is about as complex as the debate over what happens to you when you die, too. Which is to say, it is a tough, complicated topic. Here is the long and short of it:

If you are insolvent at the time of your passing - that is, your assets do not cover your debts - then you do not have much to worry about, and neither do your relatives or immediate family. In this case, the executor of your estate will sell whatever collateral you have, and pay off your creditors as best they can, at which point any outstanding amounts will be written off as a loss.

TL;DR: when you die, your debts go with you, just do not expect to have anything leftover to leave the spouse or kids...

...at least, most of the time. And this is where it gets complicated. There are certain scenarios where, for example, a family member, friend or partner may be left holding your debts. One such example is if a friend or family member has cosigned a loan, agreed to be your guarantor (more on those here http://www.cab.org.nz/vat/money/lc/pages/beingaguarantor.aspx), or is a part of a joint loan with you.

The specifics of this scenario depends on laws specific to your state or country, as well as the kind of debt you leave behind, such as:

Where It Gets Complicated

Home Loans & Mortgages

The dream of homeownership is increasingly just that: a dream. As a result, buyers are forced to go to greater extremes just to make this dream a reality.

First? They are taking out much larger loans - loans that they may not actually ever have much hope of paying off - in order to get their foot in the door. Or, more accurately, a door to put a foot through! Secondly? Family members are all too often volunteering to act as guarantors which, when it comes to who is left with your mortgage when you die, makes things much more complicated.

Here is how this process generally plays out:

  1. When you die, your estate is handed over to an executor or administrator. This is usually a relative or solicitor.
  2. If your estates worth is above a certain amount, the executor or administrator is required to obtain special permission (called a ‘probate’ or ‘letters of administration’) in order to deal with your affairs, including your debts.
  3. If this debt includes a home loan or mortgage, your estate is required to pay out any outstanding debts in a very specific order, before any remaining assets or cash is then handed out to the people you have included in your will.

In the case of a mortgage, it is not difficult to imagine a young couple, recently married, finally taking a big step and purchasing a home, and taking on an even bigger mortgage to do so. This is the most common scenario where a mortgage or debt persists long after you are gone. In this example, the spouse of the deceased will need to be able to afford the repayments if they want to remain in the home.

Thankfully, there are safeguards in place. The Consumer Financial Protection Bureau (http://www.consumerfinance.gov/) in the US has implemented a set of rules that assist surviving family members which ensure that, should you pass away, your mortgage is not “accelerated”, or due immediately after death, so that your spouse can continue to make mortgage payments.

Other options include:

  • Refinancing the loan into a more affordable state.
  • Applying for a loan modification.

Credit Card Debts

When you pass away, any outstanding credit card debts are usually repaid only after your other remaining debts have been settled, such as the mortgages or home loans mentioned above. Even then, these debts only pass on to any joint account or card holders, such as a spouse, or if you live within a community property estate where any debts incurred after marriage are considered to be ‘community property’ (this ones rather specific, so it is best to check for yourself).

It is worth mentioning that, while these debts may not automatically pass on to your children, family members or your spouse, any outstanding amounts will need to be paid out with the sale of any assets in your estate should you have one to leave.

Note: If you leave behind credit card debt, your loved ones may still be covered by a protection plan. To find out more, simply contact the card issuer.

Student Loans & Debts

Student loans are tricky, so bear with me here!

First and foremost, any federal student loans will be cancelled when the borrower passes away. So if you have a federal student loan, you do not have much to worry about. And the same goes for most ‘Parent PLUS’ loans, too.

The same cannot be said of private student loans, and this is where things get complicated. These usually require a cosigner, such as a parent or spouse, and as a result are not usually cancelled upon death. As expected, these are passed along to the cosigner, who then becomes responsible for any amount left outstanding.

Still Worried? Take Action Now Before It is Too Late

Even armed with this information, it can still be confusing - and a little scary - to think of leaving your loved ones with your financial burdens when you pass away. Here are some things you and your family can do before, during and after you are gone to ensure the process is as stress-free as possible.

  • Do what you can to pay down your debts while you are still alive, and take advantage of supporting methods like budgeting, debt settlement or debt consolidation (this page covers this in more detail https://nzcubaywide.co.nz/get-a-loan/debt-consolidation/#debt-information).
  • Apply for life insurance, which can then be put towards paying off your debts should the worst happen.
  • If someone passes away, request a copy of their credit report to find out if they have any outstanding debts.
  • Loved ones should be wary of taking any property or money from the estate after you are gone, as creditors could have a claim on the property and may come to you for payment if you have taken assets. Instead? Seek advice from a probate attorney or an estate planner.
  • Looking for more ideas on how best to get rid of your debts? This post covers the topic in even more detail: http://www.allfinancedirectory.com/news/MzgwNg==/life_happens_debt.html
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