When a loved one dies, is it possible to inherit their debt? It's a serious question for heirs, and particularly for couples who hold debt jointly. In most cases, a deceased person's debts fall to their estate for payment. However, depending on state law, shared credit relationships and the amount of debt in question, surviving family members may be shocked to learn that they could be legally liable for remaining debt that they weren't aware of or had expected their loved one's estate to cover. That's why it's wise to include debt planning in individualized estate planning as early as possible.
A recent article in The Huffington Post, titled “Debt and the Deceased: How Should Spouses and Heirs Proceed?,”offers some thoughts to consider when planning ahead.
Be honest about your financial situation. It’s not that easy for some family members to discuss debt issues, especially older Americans who hoped for better at the end of their lives. Even so, parents and their adult children or spouses should thoroughly talk about any outstanding debts that could affect the borrower's estate.
Get qualified advice. It’s easy to see that a young couple probably has a different set of debt issues than a retired couple. The article advises borrowers to speak with a qualified estate planning expert for ways to extinguish or manage debt issues as part of current financial and estate planning.
Organize your documents. The article urges you to consolidate all of your loved ones’ important financial documents in one centralized location. Ideally, all of the asset, debt, and tax documents would be included in an organized filing system… and it needs to be kept current!
See what needs to be repaid. It’s important for borrowers and their executors to know what categories of the deceased's debts will most likely need to be repaid after his or her death and which ones might be canceled. Some types of unsecured debt held in the deceased's name alone, such as credit cards or federal student loans, typically may be discharged.
Educate the executor. The article reminds us that collection agencies have the right to try to collect on any outstanding debt they are hired to pursue—even when the survivors may not be legally bound to pay the debt. You’ll need to know what debt is left behind and whether the estate or individual family members might be liable. An experienced estate planning attorney can help. Once this is done, the executor should be told of this, and if possible, the borrower should leave good notes about how the executor should respond.
Be prepared and review estate plans to address current credit issues and create an action plan for any remaining debt after the borrower dies.