04/18/2017
What Happens (To Your Debt) When you Die?
By Dan Jackson, Esq.
DISCLAIMER: this article and its contents are for illustrative and basic learning purposes only and do not constitute legal advice in any way. In many cases, the information presented is purposely presented in a broad and generalized manner to illustrate a particular point. In most cases, the underlying law is much more complex and is subject to conditions and exceptions that may lead to a different outcome or conclusion than what is being presented. You should always seek competent legal advice for any legal issues or legal questions.
At some point in life, all of us will have to face the ol’ Grim Reaper. Yes, that’s right; we will all take a dirt nap, keel over, expire, kick the bucket, or experience some other variation of the preceding terms. Unfortunately, we must all die. No mere mortal has ever escaped it, and I don’t envision a cure to death any time soon. Now that we’ve established that fact, let’s work toward having a greater knowledge of what is going to happen when we do finally die. As sad as death can be, it can be exacerbated when the deceased’s financial affairs are not in order when death comes knocking. Due to lack of planning, bad luck, poor financial decisions, or whatever, many people will die while still in debt.
The sunset years of one’s life are meant to be enjoyed through relaxation, contemplation, and a sense of fulfillment for a lifetime of hard work and sacrifice. Sadly, this is not the case for far too many. As opposed to enjoying an exciting game of shuffleboard with other retirees in a 55+ community in Florida, it appears that there are too many Grannies, Grampas, Mimis, Papas, Mamaws, and Papaws, who are busy paying pesky mortgages and costly car payments until their dying day. In fact, according to a recent survey done by creditcards.com, about 21%, or around 1 in 5 people, don’t expect to be able to pay off all their debts before they die. You might think, 1 in 5 is not that bad, but it represents a lot of people. In fact, it represents more than 60 million Americans who don’t expect to be debt-free by the time they head for the hereafter. To paraphrase from the immortal vernacular of Forrest Gump: “I may not be a smart man, but I know that’s a lot of people, Jenny.”
Let’s discuss a few points that will help you to understand what will take place if you head for the heavens before your devilish debts are all paid off.
1. When you die, your assets and debts go into your “estate”. Your estate is a legal entity that allows an administrator whom you chose to take care of, among other things, funeral expenses, distributing assets according to your wishes, and paying your debts.
2. Your estate is on the hook for most types of debt when you die. Federal student loans are one exception to this. They are discharged when you die. Some common examples of debt that won’t die when you do are mortgages, credit card debt, and auto loans. A very simple illustration: let’s say you die with a paid-for house worth $200,000, an auto loan from Jim-Bo’s “buy here pay here” with an outstanding balance of $15,000, and $10,000 in credit card debt. Your estate would have a value, after the $25,000 in credit card and auto loan debt are paid, of $175,000. This is the amount that would be distributed to your “heirs” or others who you designate through your will. Jim-Bo always gets his money (to the chagrin of many busted knee caps) and the credit card companies have all the resources they need to collect the money they are owed. The bottom line is, apart from federal student loans, your debts will need to be paid from your estate before the remaining assets can be distributed the way you wanted.
3. Debtors only come after the person who is named on the debt. On the bright side, you can rest assured that when you die, other people in your family – as long as they are not listed on the debt as a co-signer or a joint account holder – are not going to be responsible for your debt. However, you should take into consideration the impact you want to leave on a family member if you decide that he or she MUST be a co-signer to enable you to buy that used Warner Bros. edition of the Chevy Venture. Who would want one of those anyway? It is also important to note that some states will hold a spouse liable for debts incurred while married to the deceased. Those states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Even then, however, the surviving spouse will be responsible for no more than half of the total debt. As a rule of thumb, it would be prudent for you to know who else is “attached” to your debt through co-signing or being a joint account holder and work to mitigate the damage for them when you pass away.
4. Not all debt is created equal. To play on the Gettysburg Address a bit, let me be clear that unlike the proposition of man’s equality that the Greatest President so eloquently reminded us of, not all debts are created equal in the eyes of the law. There is a pecking order in the debt world, and credit card debt is near the bottom of that pecking order. Generally, the priority is as follows: Reasonable administrative expenses including attorney’s fees, reasonable funeral expenses for the deceased included expenses of final illness, federal and then state tax liens, federal and then state taxes, Medicaid claims, and then other debts like mortgages, car loans, and credit cards. The benefit mortgages and car loans have over credit cards is that they are secured. This means that the mortgage company or car loan bank can come after the home or car if the loan is not paid, thus giving them a better chance of recovering the debt. The credit card companies have much less leverage and thus, a smaller chance of getting paid back when there are not enough assets to pay all of the debts of an estate. Don’t misunderstand! If you have enough assets in your estate to cover all your debts, even the lowly credit card companies will get paid.
5. Life insurance and investments are generally safe from creditors. Your life insurance and investments generally have beneficiaries whom you designate to get the funds once you die. As a result, neither of these will normally go through to your estate. In order to make sure your investments and life insurance are passed on to the person you want, make sure your beneficiaries stay up to date. If you don’t have beneficiaries, the money from investments and life insurance will revert back to your estate and will be used to pay debts, taxes, and other liabilities before it is finally disbursed.
