What will you leave behind you when you die? When you hear that question, your first thoughts may be of the assets you hope to leave to your loved ones. But what about the debt you have accumulated during your lifetime? Even if you have tried to live largely without debt, the expenses of your last illness may be significant. What happens to the various types of debt that may linger in the wake of your passing?
If this is the first time you've thought about that question, you are not alone. Most people lack clarity on the question of what happens to their debt after they die. Unfortunately, focusing only on the assets you hope to leave, and not on the debt you may leave, could thwart your goals for your estate plan. Letting your estate planning attorney know about the debt that you have when you create your estate plan can help to protect your family after you die.
The bad news, from a debtor's standpoint, is that most debt does not cease to exist when the person who incurred it dies. There are many types of debt, and their treatment varies. Part of administering a probate estate involves notifying known creditors of the deceased, and publishing a notice for unknown creditors, so that they can make claims against the estate in the time frame provided. In general, if an estate is solvent (has more assets than debts), the personal representative will pay all of the claims against the estate and distribute the remainder to heirs. If the estate is insolvent (has more debts than assets available to pay them), the personal representative will need to refer to state law to decide which debt will be paid in full, which will be paid in part, and which may not get paid at all.
Whether your family is responsible for any portion of your debt depends on whether your estate is insolvent, and the types of debt in question.
Medical debt is typically not passed on to a deceased person's surviving family, except if a family member co-signed for the care or guaranteed payment. As with other creditors, the medical care provider would need to file a claim against the estate. If your loved one did guarantee your medical debt, it is possible they would be able to settle that debt at a significant discount.
Student loan debt may or may not be discharged after your debt, depending on the circumstances. The loan company can make a claim for payment against your estate, but as a general rule, federal loans are discharged after the borrower's death. However, if a family member co-signed for your loan, they will still be held responsible for repayment. As for private student loans, the terms of the promissory note you signed should indicate whether or not the loan would be discharged upon your death.
Mortgage debt is secured by the property on which the mortgage was taken, meaning your family will probably need to keep making payments if they want to keep the property. When you took on the mortgage, you signed a note, which represented your personal responsibility for the debt. This obligation expires when you die, but because the mortgage is secured by the property, your heirs' failure to pay the mortgage debt will result in foreclosure.
Credit card debt will need to be paid by a family member with whom you had a joint credit card account, or if you live in a community property state like California. Otherwise, if the credit card is in your sole name, the credit card company can make a claim for the debt against your estate, but your family will not inherit the debt.
Car loans are similar to mortgages in that your personal obligation to pay the debt expires on your death, but the lender has a security interest in the car. If there are payments due, they must be made in order for your heir or beneficiary to be able to keep the car. The remaining debt may be paid out of estate funds or your heir or beneficiary can make the payments. Otherwise, the car will be repossessed.
Child support and spousal support in Michigan is generally treated as a judgment debt when each payment comes due, and back support debt does not disappear when you die. The person to whom it is owed may file a claim against your estate for the amount that was due at your death. Look at your divorce judgment before making or updating your estate plan. It is common in Michigan for payers of support to be required to take out a life insurance policy to secure child support payments that have not yet come due.
Tax debt may or may not need to be repaid after your death, depending on the type of debt, how long ago it was incurred, and whether the government has filed a tax lien. Many people are ashamed to have tax debt, but ignoring or failing to mention it won't make it go away. This is something you should definitely mention to your estate planning attorney.
Personal loans are difficult to classify because they take different forms. Usually, the creditor is able to file a claim against the estate. If the debt was secured, the creditor may be able to claim the property securing the debt as payment. If you have taken out personal loans, bring any documentation to your estate planning attorney for advice as to how they will affect your planning.
Thinking about debt is uncomfortable, but don't be embarrassed to bring the topic up with your estate planning attorney. He or she will be the first person to tell you that you are not alone in needing to plan for your debt, and will be in the best position to help you protect your loved ones against being responsible for it.
You may also be interested in: