Debt is a promise to pay back a specific amount of money in a specified manner. Unfortunately, the nature of debt means that it does not take a backseat when tragedy strikes.
Many people are unaware of how their debts may affect their loved ones, so here we have broken down who, when and why someone may inherit your debt.
When a parent passes away, children are often left to wade through possessions, property sales and financial baggage.
Outstanding balances can be daunting to family members—especially if they were unaware the debts existed. Fortunately, most debts die with the individual. However, there are a few exceptions. When someone dies, the executor of their will is responsible for using their assets to pay as many debts as possible. These payments have to be made in a specific order: secured debts, unsecured debts and inheritances defined in the will.
Secured debts: A secured debt has physical collateral attached that guarantees the balance will be paid to the creditor, such as a car or home. If the deceased has not paid off their car or mortgage, these items may be repossessed.
*Note: The heirs of an estate may decide to use the estate to pay off a home mortgage and take possession of the home or take over the mortgage payments themselves. They may also choose to refinance and sell the house in order to pay off the remaining amount.
Unsecured debts: Unsecured debts do not have physical collateral attached, like credit card debt or medical bills. While family members are not legally bound to pay these debts, the executor may be required to use part (or all) of the inheritance money to pay off the remaining amounts. If the estate is not worth enough to pay off the balances, the money is divided between the creditors (if there are multiples) and the remaining balance is written off as a loss.
*Note: Federal student loans are forgiven when someone dies, but a personal student loan is considered an unsecured debt.
Inheritances: After all the debts have been settled, the remaining estate is used as inheritance as it’s defined in the will.
Joint account holders whose income and credit history are used to get a joint loan or credit card will be held responsible for shared debts.
Creditors and guarantors
When someone becomes a cosigner or guarantor for another, they assume full financial responsibility for money owed. Cosigners are responsible for paying the full amount on a credit card, rent, etc. even when the original signer passes away.
Creditors usually have a fixed period of time to make claims against an estate. Typically between two and six months, if a claim in not made in the allotted time, it will be counted as a loss to the creditor.
*Note: Cosigners and guarantors are also responsible for the full amount of a debt of the original signer declares bankruptcy.
With this information in mind, getting your affairs in order (at any age) is very important. Debt may be farther reaching than you originally thought, so while it may be uncomfortable, talk with elderly parents about the state of their affairs and put serious consideration in before becoming a cosigner for someone—even a loved one. Being educated and prepared will help you bettered categorize and understand the responsibilities of those left behind.