Q. I was having a conversation with my father at Thanksgiving dinner this year about debt. I am middle-aged, and am in a long-term relationship, but have never been married. I currently have a lot of debt, including student loans from going back to school, a mortgage, medical bills, and credit card debt. If I should, God forbid, get hit by a bus tomorrow, what would happen to all my debt? Would my parents have to pay it? Or would some or all of it disappear? I told my dad I would ask you and report back at Christmas. Thanks in advance for your help!
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A. You obviously won’t have to pay loans after you pass away, but that doesn’t necessarily mean they disappear into thin air.
When it comes to debt, there are many factors that can affect repayment after death, such as where you live, the types of loans you have, as well as who applied for them and whether anyone else co-signed or gave a personal guarantee.
While it’s not pleasant to think about your eventual demise, it’s necessary to know if your debt could be passed onto another person.
When Someone May Be Responsible for Paying Back Your Debts
Your loans are the responsibility of your estate. Therefore, whoever is responsible for dealing with your estate (either the trustee of your living trust or – if you haven’t gotten around to creating a living trust to avoid probate – the executor of your last will and testament) will use your assets to pay off your debts. If you don’t have enough assets to pay off all debts, then your estate is considered insolvent, and the state of your death will determine the priority of claims of debtors against your estate.
• If you live in a community property state — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin, then your spouse may have to pay back your loans from half of any community property. This doesn’t include any loans you have that came before the marriage. All states have different rules, so it’s best to check what will apply to your situation.
• If someone co-signed or guaranteed a loan for you or if you have joint credit accounts such as credit card you applied for with your spouse, then the co-signer, guarantor, or surviving account holders will be fully responsible to pay off the whole debt.
• There is also the “filial responsibility” law that could hold your adult children responsible for paying back loans that are related to medical or long-term care. The same works in reverse, where parents may be liable to pay off debts of adult children. Currently, there are around 30 states that enforce this law, including Maryland, Pennsylvania, and Virginia. Some enforce this law pretty strictly, so it’s best to check with your state to see what could happen. Please read our blog articles on filial responsibility for more information.
Below are several different types of specific loans, and what could happen with each when you pass on:
Credit Card Debt
What happens to credit card debt after you die depends on who has signed for it, as well as the laws in your individual state:
If you have a joint account with your deceased loved one, where you co-signed the application for the credit card, then you become responsible for that debt. Keep in mind that “authorized users” who didn’t sign the credit card application, are NOT responsible for the debt.
If you aren’t on the account, you don’t inherit the debt. Instead, the debt should typically be paid off with assets from the estate. In cases where there are unpaid debts when your loved one dies, the successor trustee of your living trust or the executor of your will should use the assets to pay off debts. Secured debts (mortgage, car) are paid first, and unsecured debts, such as credit cards, are tackled next.
If there is not enough money to pay all the debts, some creditors might have to take a loss – every state has laws specifying which types of creditors have priority over others.
Mortgages
What happens with a mortgage depends. If there’s a joint homeowner or if someone inherits the house, then they’d be responsible for the making the mortgage payments if they want to continue to live in the house, even if they didn’t sign the Promissory Note agreeing to repay the loan, because if they don’t pay the mortgage, then the lender can foreclose. If you’re in this situation, keep the following in mind:
• Federal law bars lenders from forcing a joint owner to pay off the mortgage immediately after the death of another co-owner. If there’s no joint homeowner, the executor can pay the mortgage out of the estate.
• If there’s not enough money in the estate, or if the real estate was left “subject to” the mortgage (which is most often the case), then a family member who inherits the house can simply take over the mortgage payments.
Reverse Mortgage
A lender can force someone who inherits a home to repay a reverse mortgage loan immediately, which could require selling the house. In a worst-case scenario, your heirs may have to sell your property to pay back your reverse mortgage. Or if there’s no equity left in the home, then your heirs can simply abandon the real estate.
Car Loans
Car loans are similar to the other types of debt we have discussed. The steps for handling this type of debt will depend on whose name is on the loan and where you live. If your heirs or co-signer are willing to take over your payments, the lender won’t need to take any action. However, the lender can repossess the car if the loan isn’t paid back.
Student Loans
The estate should pay off private student loan debt, but lenders have no recourse if the estate doesn’t have assets to repay unsecured obligations such as student loans.
But:
• Co-signers of private student loans will be responsible for remaining debt.
• In community property states, the spouse may be responsible if the student loan debt was incurred during the marriage.
Some lenders of private student loans will forgive the debt upon death, including Sallie Mae and Wells Fargo.
Federal student loans are discharged upon your death.
If a student’s parent has a federal PLUS loan, it will be discharged upon the death of either the parent or student.
Medical Bills
If you have outstanding medical bills, nursing home bills, or any expense related to your long-term care, your spouse or family members may be responsible for paying it back per your state’s filial responsibility laws, if they agreed in advance to be liable (such as by co-signing or guaranteeing a particular transaction), or if you are a dependent.
Protect Your Loved Ones from Having to Pay Your Debts
At the Farr Law Firm, we have strategies in place to help all types of families plan for themselves and their loved ones.
For most Americans over 65, the Living Trust Plus™ (LTP) is the preferable form of asset protection trust. The LTP protects your assets from lawsuits, auto accidents, creditor attacks, medical expenses, and, most importantly, from the catastrophic typically often incurred in connection with nursing home care.
If you’re a client or potential client who would like more information about LTP, please attend one of our informational seminars in Fairfax. Our seminars teach attendees how to protect their assets from the expenses of probate and long-term care, how to obtain valuable Medicaid and Veterans benefits to pay for long-term care, how to protect assets from lawsuits, divorce, and long-term care creditors, and more.
With advance planning, each person, regardless of their family situation, can protect and retain the assets it has taken a lifetime to accumulate. If you or members of your family have not done your estate planning, or not had it reviewed and updated in the last five years, are in need of nursing home care in the not-so-distant future, or are already in a nursing home, please contact us as soon as possible to make an appointment for a consultation:
Fairfax Estate Planning: 703-691-1888
Fredericksburg Estate Planning: 540-479-1435
Rockville Estate Planning: 301-519-8041
DC Estate Planning: 202-587-2797
About Evan H Farr, CELA, CAP
