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What Happens to Debt When You Die?

Benjamin Franklin famously quipped that life’s only certainties are death and taxes. Things have become a little more complicated since Ben’s day, however. He never had a credit card.

Debt from credit cards and other loans can persist after death, and while it’s no one’s favorite topic, it’s important for surviving family members to understand how creditors handle those obligations, and what to do about them. It’s important to notify creditors of a borrower’s death as soon as is practical (more that below) and the first step in doing so is to sort out what is owed, and to whom.

Whose debt is it, anyway?

If the deceased left a will, the executor of the estate works with creditors and survivors to settle outstanding debts. In the absence of a will, a local probate court will handle those duties.

Often, the first thing to consider when settling a dead person’s debts is to determine what they owe. An effective method is for the executor or probate officer to obtain the dead person’s credit report, which lists all their open credit accounts.

Once the debts are known, the next step is to determine whether those debts belonged to the deceased alone, or if they are shared with someone else. If a debt is shared, the surviving party becomes responsible for paying it off.

Many shared obligations are expected, as in the case of a mortgage obtained in a joint application by two spouses. But sometimes it comes as a surprise, as in the case of a credit card used only by the deceased person, for which a parent, spouse, or even ex-spouse co-signed many years before—perhaps as an authorized user. A good way to avoid surprises of this nature is to check your own credit report, which lists all your credit accounts, including those for which you are a co-signer.

In so-called “joint-property” states, certain types of debt also may become the responsibility of a surviving spouse even for loans issued solely to the spouse who died. There are nine joint or community property states, according to LegalZoom: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska gives both parties the option to make their property community.

If you’re the co-signer for debts shared with a deceased person, keep payments up-to-date, because late and missed payments can have negative effects on your credit reports and credit scores. Even if you expect to settle the debt in full using funds from the late person’s estate, try to pay at least the minimum balance required each month until the estate is settled.

Settling the estate

Debts that belong solely to the deceased person fall into two categories, secured and unsecured. Secured loans, such as mortgages and auto loans, have collateral the lender can seize if the loan isn’t repaid. Unsecured loans, such as credit card debt and student loans, lack collateral.

Settlement of an estate’s secured debts determines what happens to the property in question. Depending on the estate’s assets and provisions made by the deceased before they died, the estate could pay off the debts in full or continue making installment payments (through a trust or other legal entity). Alternatively, the property might be sold, refinanced, or turned over to the lender to satisfy the debt.

Unsecured debts belonging to the deceased typically must be paid from their estate. If a person dies with say, $7,000 in a savings account and $2,500 in credit card debt, the card issuer would typically be paid off before the $4,500 in remaining savings could be distributed to heirs. If there are multiple creditors with total claims greater than the amount held by the estate, state law determines which claimants get paid, and how much. If the estate lacks the funds to cover unsecured debts, lenders are typically out of luck and must write off the debt.

Certain types of financial assets held by the estate may be shielded from creditors. These include 401(k) retirement funds, some insurance benefits, and the contents of trust accounts.  Sorting out which assets can and cannot be used to settle debts can be complicated, as can the laws that govern that process. Survivors and/or the executor of the estate would be wise to consult a lawyer who can help navigate the legal details.

Notifying creditors of a borrower’s death

Once the deceased person’s debts have been identified, surviving family members (or the executor of the estate, working on their behalf) should notify creditors the debtor has died. A copy of the death certificate should be sent to each creditor.

This serves a couple of purposes. It typically prevents creditors from attempting to collect unpaid bills while the estate is being sorted out—a process that can be disturbing to surviving family members.

Once notified of the death, the creditors also inform the national credit bureaus (Experian, Equifax, and TransUnion) of the death. The bureaus then tag the deceased person’s credit reports, to block fraudsters from applying for credit in their name.

While not directly related to the deceased person’s debt, it’s important (and a legal requirement) to notify the Social Security Administration (SSA) when anyone who has a Social Security number dies. The SSA also notifies credit bureaus so identity thieves cannot use the dead person’s Social Security number to apply for credit or commit other fraud. Survivors wouldn’t have any financial exposure from bogus loans issued in the name of identity-theft victims, but this ensures that duped lenders won’t unknowingly hassle family members for unpaid loans.

The death of a family member is never easy, and finances are often the last thing on the mind of a grieving relative. Understanding the steps required to settle a dead person’s debts can spare needless complications in the weeks and months following the loss.

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