In the best of times talking about debt and personal finances is hard even with your own parents (How to Talk About Money and Debt with Your Parents When The Family Isn’t Wealthy ft Cameron Huddleston) and spouse (From Money Dates to Money Moves ft. Elle Martinez of Couple Money). If it’s hard when they’re present in your life imagine how much more difficult the conversation becomes when an unexpected death occurs. We received a great #AskPB question just in time for Halloween this National Financial Planning Month: what happens to debt after death?

Sticking with our promise to find subject matter experts for questions outside of our direct expertise, we welcome back Leslie Tayne, Esq., debt expert and author of Life & Debt, to help us answer this great question!

Until Debt Do Us Part

Leslie originally joined us on the Paychecks & Balances podcast for Learn to Love Your Debt, Leslie Tayne, Esq – PB100. Today we’ll cover: How do debt rights work for couples? How do those rights change after you exchange wedding vows? ( and just in case, how does debt divide in divorce?) Lastly, who’s debt are you responsible for when it comes to a spouse, child or parent?

How do debt rights work for couples (unmarried)?

§ Unmarried couples are not responsible for each other’s debts unless they have joint accounts. Therefore, any debt problems your partner has cannot negatively affect you unless you have in some way joined your finances together, such as co-signing a loan, signing a purchase agreement together or opening a joint bank account. In some cases, registering as domestic partners may change your debt obligations.

How do debt obligations change once married?

§ That depends on the type of debt you have and what state you reside in. Some laws differ when it comes to the responsibility of debt like medical debt can become the obligation of a spouse. However, most debts that are contract-based, like student loans, credit cards, cars, and mortgages, would not become the obligation of the new spouse unless added as a co-obligor.  

How does debt work after divorce? 

§ Debt after divorce depends on the type of debt, the state you live in, who has the debt, the purpose of the debt, length of the marriage and a myriad of other factors. For the purpose of debtor-creditor laws, the fact remains that whoever is the obligor is legally responsible for the debt. That doesn’t change with a divorce agreement unless the debt is transferred to a new obligor. So that means that even if your agreement says your spouse has to pay and then doesn’t the creditor can come after you if you are the obligor of the debt.

It’s very advisable when getting divorced to either pay off the debt during the divorce or the proceeds of marital assets or transfer the debt to the person who will be obligated to pay the debt through the divorce agreement. Additionally, if your ex files bankruptcy, it could also affect you. The bankruptcy won’t erase the debts but will get rid of their liability to pay them, meaning you’ll be solely on the hook for those debts.

Who’s Debt Am I Responsible For After Death

Debt and death, or debt after death, are topics we don’t want to think about but both happen. As a #LifeHack, I recommend saving your personal finance passwords (printed out) in a secure folder, safety deposit box, or for the tech-savvy, LastPass (or secure password software equivalent).

Why?

If you’ve been fortunate enough not to experience a loss of life from a significant other or family member, then I’ll tell you that life gets hectic for your family and friends, FAST. The last thing you want the people you love–in the midst of mourning and coping–is also worrying about where to find that one password or secret account that will allow them to access those now password protected and locked accounts containing your life insurance information, the checking account used to pay the mortgage, or your 401k’s beneficiaries, etc. You can’t predict the future but YOU CAN PLAN AHEAD.

In addition, Leslie graciously explains how to legally and mentally prepare your personal finances for yourself, marriage, and children.

What happens to debt after death in the event of a loss of the following:

§ Spouse?

Spouses can be responsible for their partner’s debt after their death if they have joint accounts, have co-signed a loan or live in one of the nine community property states.

It’s important to note that joint account holders and authorized cardholders are treated differently when it comes to debt after death. Joint account holders will have a responsibility for the debt, but authorized users will not.

Additionally, mortgage and car payments must continue to be made even upon a spouse’s debt, unless you want to lose that collateral so the spouse may be on the hook to make mortgage and auto payments.

However, most other debt, such as credit card and student loan debt, will be taken care of by the deceased’s estate. Generally, if the deceased doesn’t have an estate or if it’s not enough to cover their debts, the creditors are out of luck. This could also affect how much the spouse receives as an inheritance, as debts are paid out before inheritances are distributed.

§ Children?

Children are generally not responsible for their parents’ debt if they die.

Once again, the only cases in which they would be on the hook would be if they held a joint debt or had co-signed a loan with their parent. If a parent had taken out a Parent PLUS student loan on behalf of the child, the loan is excused upon the death of the parent.

If children are in line to inherit from the parent, their inheritance could be affected if their parent died with debt, because the parent’s estate may be used to pay off any outstanding debts before any assets are distributed to heirs.

§ Parents?

Similarly, parents will not be held responsible for their children’s debt in the unfortunate event of their child’s passing unless they have a joint account or have co-signed a loan. Additionally, if the parent has taken out a Parent PLUS student loan, the loan is also forgiven upon the death of the child.

Who Should be Notified of Your Loved One’s Debt?

When a loved one has passed away, it’s important to notify all relevant financial parties of their death. Therefore, credit card companies, the three credit bureaus, banks, etc. should be made aware. In many cases, you may be required to submit a copy of the death certificate.

What types of professionals should you contact if you are stuck with a loved one’s debt after death?

In the unfortunate situation that you are dealing with the death of a loved one as well as with being responsible for their debt, you may want to seek the help of a debt attorney or an estate law attorney. These professionals can help you sort out what you do and don’t owe and the best course of action to take to get everything resolved and paid for.

What are some actionable steps you can take to make sure debt isn’t passed down to family?

By taking preventative measures now, you can ensure that you’re not leaving your family with a mess. First of all, keeping your overall debt low throughout your life will be key.

On top of that, knowing what will happen to your debt upon your passing can help you plan accordingly. Additionally, have discussions with any family member that’s considering opening a joint account or co-signing a loan with you. Make sure they’re aware that they will be responsible for the debt in the event of your death.

In general, keeping trusted loved ones in the loop about your financial situations and letting someone know where your account and login information is can be helpful in sorting things out for your family. 

What You Don’t Know About Your Debt Can Hurt You and Your Loved Ones

It’s cliche but knowledge is power. They hide information in books, like Cameron Huddleston’s great book How to Have Essential Conversations With Your Parents About Their Finances or the 15 Best Personal Finance Books We Read and Reviewed. When in doubt, consult with an expert.

What are their ‘debt rights’ and where can I find more resources?

When it comes to debt, borrowers have rights when it comes to debt collection practices as well as how long they can be held responsible for debt. The Fair Debt Collection Protection Act protects borrowers from unfair debt collection practices, including harassment, threats, and calling at certain hours of the day.

Additionally, all debt has a statute of limitations, meaning at a certain point legal action can no longer be taken against the borrower in regards to that debt. Statutes of limitations differ from state to state and based on the kind of debt.

When should a lawyer be consulted?

A lawyer should be consulted any time legal action is being taken against the borrower. A lawyer can help you determine the best path to take and to help you understand the often-confusing legal side of debt. But you may also want to consult a debt attorney if you’re simply struggling with debt and are looking to avoid getting sued for your debt. A debt attorney can help get you on the right path to avoid legal action.

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