Dying with Debt: What can creditors go after?
A recent study shows that 73 percent of Americans will be dying with debt. The average debt load at death will be $61,554, including mortgage debt. So what exactly happens with this debt when you die? The answer, of course, is that it depends.
Probate is the legal process for proving of a will and for administering your estate after you die. During that process a court appointed administrator will determine how any funds are distributed – to beneficiaries and creditors alike. What type of debt they hold will help determine whether they have a claim and what happens to the debt when you die.
Let's look at some different types of debt
Inherited Debt: These include such things as cosigned loans and joint debt. If the deceased (the “decedent”) has cosigned a loan with someone else, such as their spouse, then that debt is not cancelled. Rather, the spouse becomes the sole debtor of the debt.
Secured Debts: These debts, such as car loans and mortgages are backed by collateral; if the debt is not paid, then the debt holder can collect on the collateral instead. Depending on how the estate is set up, the secured debt might be paid off by the estate, or installment payments made until the property transfers to another party.
Unsecured Debt: Unsecured debt includes things like private student loans, credit cards, and various other personal loans. These debts will generally be paid from your estate. If upon death you have several credit cards, for example, then each would have a claim on the estate. Based on the applicable statute, each creditor would be apportioned an amount from your estate.
Federal Student Loans: If a borrower of a federal student loan dies without the debt being paid, then the loan is automatically canceled and the debt is discharged. Importantly, this applies only to federal student loans. Private student loans are handled differently, i.e., they are probably inherited debt if there is a cosigner, or unsecured debt.
Now for the good news
The entire estate is not open up for grabs to any creditor that comes along. For example: retirement accounts (including, for example , 401(k), IRAs, and health savings accounts) and brokerage accounts are not funds available to creditors. Life insurance proceeds are also not available to creditors. Also, assets placed in a irrevocable living trust can be shielded from certain creditors. With proper structuring, your assets can be protected from creditors upon your death.
Takeaway
How you set up your estate to manage your debt when you die will have a significant impact on what you leave to your heirs. If you need someone to review your estate plan to see how your debt will affect your heirs, contact Signature Law for a free consultation.