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What debts remain after death?

What debts remain after death?

By Rachel Sears

While you’re considering what will happen to your loved ones and your estate after your death, it can seem overwhelming to ensure that everything is in order. The good news is that if you already have an estate plan in place, you’re on the right track to ensuring a smooth transition.

One aspect that you should be sure to take into consideration is what will happen to any outstanding debts you’ve incurred after your death.

Outstanding student loans

In the case of federal student loans, all debts are forgiven if the borrower dies. Private loans, on the other hand, may or may not offer debt relief so be sure to determine where your loans are held and what information (like a death certificate) may need to be provided if asking for forgiveness of existing student loans.

If you’re not sure if your student loans are federal or private, you can visit studentaid.gov or call 1-800-4-FED-AID to determine if the loan is federal and who services it.

Credit card debt

Outstanding credit card debt is typically paid from the deceased person’s estate. While children are not responsible for taking on any remaining credit card debt, a surviving spouse may be responsible for continuing to make payments if they are a joint borrower on the account. It’s important to note that if you live in a community property state, your spouse may be responsible for any credit card debt you had incurred, even if they were not a joint borrower on the account. (Maine is not a community property state.)

If the estate’s assets cannot cover the amount of debt owed and there are no joint borrowers, the credit card company accepts the outstanding debt as a loss to the extent the assets in the estate are insufficient and if no other creditor has been paid more than its pro rata amount of the sums available in the estate.

Mortgage and home equity loans

If there is a co-signer on your mortgage, that person automatically assumes all responsibility for the existing loan. It’s important to note that a co-owner does not share the same financial responsibility, but they risk the property being seized by the lender if payments on the existing mortgage stop, so they may be inclined to continue paying it off.

In the case of a property you own on your own, your estate assumes responsibility for your remaining mortgage. If you leave your property to someone else, they may be responsible for continuing those payments if the beneficiary desires to keep the property and avoid foreclosure.

How to protect your beneficiaries

While creditors may have access to your estate to repay outstanding debts, there are some areas that are protected if you prepare in advance. Naming beneficiaries on things like retirement accounts and life insurance policies ensures that those funds go directly to the intended recipients and are not at risk of being collected by creditors.

This serves as important reminder to keep your beneficiaries updated on these types of documents. If you’re ready to update your estate plan, or if you have any questions, our attorneys are here to help.