Death rarely makes an appointment and families often avoid confronting the inevitable with proper estate planning. Debt forgiveness may occur during life through events like bankruptcy or foreclosure, but what happens to your debt when you die? If your estate doesn't cover all your bills, will your family members need to foot the bill?
As it turns out, there's more than one answer to that question. In many cases, the Federal Trade Commission (FTC) provides financial protections for your family members, but there are conditions where they might owe money.
What Happens to Your Debt When You Die?
Credit Card Debt
MasterCard may not send an immediate debt collection letter to your spouse or children if you leave a balance behind, but your creditors have other methods for collecting.
Often, a credit card company won't be able to collect any more than is available from your estate. However, there are circumstances where family members may become responsible, so it's essential to investigate what happens to your debt when you die if you have credit cards.
- Joint cardholders. If your name is on the account as a co-signer, the credit card company may send you bills. This occurs commonly with adult children who got their first credit card with a parent's help and were co-signers during the account's creation.
- Divorce settlements. The terms of a divorce may specify which spouse pays a credit card; however, credit card companies may not honor divorce agreements, particularly if a former spouse's name is on the account.
Note that authorized users won't become responsible for paying the debt on a credit card, but it's essential that a card isn't used after a person's death. Technically, a deceased person can no longer give authorization to another user.
Interestingly, some card companies that feature reward points or other benefits on cards, such as American Express, offer to give those accumulated benefits to the members of the deceased's estate.
Dealing With Mortgage Payments
Married couples routinely own houses together, and both names also tend to be on the mortgage, so payments after a spouse's death are common. Surviving spouses and family members often use mortgage insurance or life insurance to pay a mortgage.
Not unexpectedly, if a spouse's name isn't on the deed to the home or the mortgage, the bank may choose to sell the house and pay off the mortgage with the proceeds. To avoid foreclosure problems, creation of a will or trust helps keep the home in family hands.
In addition, estate planning helps survivors avoid due-on-sale clauses, which is a feature in some promissory notes that allows banks to request that the full balance of a mortgage be paid upon transfer of ownership.
Further Considerations for Estate Planning
Families who don't own significant property routinely assume that estate planning isn't necessary because there's no physical "estate," but that's not what the word means. Everyone has an estate when he or she passes, and it includes all possessions, from a pair of shoes to a house.
Also, remember that the Internal Revenue Service (IRS) may get involved because of trust income, so figuring out what happens to your debt when you die is best done before the unfortunate event occurs. Creditors will also be informed of a death by the Social Security Administration so bill collectors will come knocking one way or another to find their money.
Estate planning can become complicated when there's a mortgage, a few credit cards, and other common debts hanging around. Getting legal assistance and figuring out what happens to your debt when you die is essential, even if the topic is hard to confront.
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DISCLAIMER: All information on this website are provided for informational purposes only and are not intended to be construed as legal advice. Suburban Legal Group PC shall not be liable for any errors or inaccuracies contained herein, or any actions taken in reliance thereon.