Outstanding debts do not breeze through after death, but not all are your responsibility. Having to inherit debts after losing a loved one might not be pleasant if you are also not financially buoyant. This situation might make you wonder if taking charge of them is necessary and how to do it.
Simply put, you can’t inherit a debt. However, certain types can require you to pay up. A deceased asset is commonly used in clearing these debts, but sometimes, they are not enough. This is why it is essential to know how debts are passed on and how to get them sorted.
How Debts Are Handled When Someone Passes Away
What happens to debts when you die? An individual’s estate is said to include their debts. After their demise, the estate will be responsible for loan repayments and other outstanding debts. The money is usually gotten from their assets that can be liquidated. The whole process is mainly carried out by an executor, who manages the deceased estate by:
- Preparing an inventory.
- Getting the probate court the written will if the person prepared any before their death.
- Liquidating available assets to clear off debts.
- Informing social services and lenders of the person’s demise.
- Ensuring heirs receive the assets assigned to them following the deceased person’s will.
It is also one of the Power of Attorney responsibilities to make financial decisions on behalf of the deceased.
After an executor has notified creditors who need repayments from the estate, a certain period is given to allow them to make necessary claims and recover their loans. If the assets are insufficient to clear the debts, the creditors will have to write them off and make no payment requests. Same with debts after death with no estate.
Types of Inheritable Debts
- Joint Debts
What happens to credit card debt when you die? If you jointly held a debt with someone before their demise, you will have to inherit it. You’ll be in charge of the debt repayment if you and your dead partner jointly own a credit card whose payment you make together. If you were just an authorized user, any outstanding debt won’t be your responsibility.
- Cosigned Debts
Should you cosign a loan request with anyone, you will inherit their Debt if they were unable to pay up before dying. Technically, you agreed to make it your responsibility while cosigning the loan; death doesn’t take that apart. Luckily, their estate might cover it; otherwise, it’ll be your duty. And if you don’t keep up with payments, the loan company can call your employer.
- Home Equity Loan
If the deceased person’s will or inheritance law made you the owner of a house with unpaid loans, you might end up inheriting the Debt. Home equity loans are passed on to the new owner, meaning what happens to the outstanding loans, and the house is up to you. If you decide to hold on to its ownership, you should be ready to repay the loans. The other option will be putting the house on sale. While preparing to do that, you’ll also need to keep up with payments till it’s done.
- Debt in the Community Property States
When married in some states, the couple’s income and property equally belong to both parties. And that also applies to any borrowed funds. They are called community property states, and a living partner will solely clear off their debts when the other dies. This law is binding in states like Louisiana, Wisconsin, Arizona, Texas, etc.
How Are Medical Bills Cleared After a Patient’s Death?
If your parents die with uncleared medical bills, their estate will take the payment responsibility. Once the assets are liquidated, a list of outstanding debts is made, and medical debts are given priority. The remaining fraction will be written off or transferred to you under filial responsibility if the asset is insufficient. This law is, however, not strictly enforced.
Can a Payday Loan Debt Be Inherited?
Like a credit card debt, a debt accrued from payday loans is not inherited by the children. If it were, however, acquired within marriage in a community property state, the partner would have to take responsibility. If caught in such a position, you can reduce the interest rates with the help of debt assistants in charge of payday loans. If default, you might face the consequences of not paying back a payday loan.
Which Assets Can’t Be Claimed By Creditors?
Some assets are protected against possession by money lenders after the owner’s death. The assets are usually assigned to a beneficiary, making them non-probate. They cannot be used for repayments even if the deceased person has outstanding debts.
- Retirement accounts: Retirement accounts like 401(k) or IRA, which have a designated beneficiary go to their new owners, away from the reach of lenders.
- Their Life insurance: If your parents or spouse named you a beneficiary for their life insurance, you would get it after their death.
- Inter-Vivos Trust: You can also get assets kept in living trusts if you are named a beneficiary. They are legal documents and can sideline probate processes.
Whether or not you inherit a debt depends on the type and your position in the deceased person’s life. It is advisable to quickly pay off an inherited debt and keep creditors off your neck or prevent an excessive interest increase. If you are not buoyant enough, you can get installment loans on Capital Pacific Bank and pay them back in bits. The funding is fast, and your repayment term can last for months or years.