13 Warning Signs That You Have a Debt Problem
Learn red flags to watch out for that could prevent you from building wealth and solutions to turn around your financial life.
Imagine your spouse of 20 years just died. You begin to grieve, contact distant relatives, and start planning a funeral. But then you get a phone call from a debt collector — asking you to pay your deceased spouse’s $1,000 credit card bill…
Sadly, this is a reality for many Americans.
No one likes thinking about death. But, it is the only real guarantee in life.
So, it’s important to know what happens to your debt when you die. That way, you can make solid plans for your family’s future. After all, you want to make sure your loved ones are financially secure after you’re gone.
But as you’ll see, not all debts are created equal when it comes to your estate, which is everything you own minus all that you owe at the time of your death. Situations with debt after you die vary, based on what types of debt you have and where you live.
Seventy-three percent of Americans die with debt. And on average, they die $62,000 in the red.
To ensure your assets get to their rightful heir, you’re going to need to plan how you’ll do that — and make a plan to take care all your debt once you’re gone. It’s called estate planning and will involve you writing out a will, which is a basic document explaining who gets what and who’s in charge of your estate after your death.
In your will you appoint someone as your personal representative, commonly referred to as your executor. They will be responsible for tracking down your creditors through a legal process called probate and making sure they receive payment from your estate. Your heirs will benefit from your will once the debts are taken care of.
There are situations where heirs may not receive anything. This is because the deceased’s debts outweigh their assets. In that case, creditors may not receive anything, either. That’s because creditors can make legal claims against the estate, but they can’t go after your inheritors. Once the estate’s money is gone, there’s nothing left to pay them. But the good news is that they can’t go after your loved ones to make up any difference.
Here’s look at the different types of debts Americans die with and how much they owe for each…
When you die your debts can take away from assets you may have hoped to pass on to your heirs. Your estate will only be able to leave them what is left after debts are deducted from the overall estate.
Mortgages are considered secured debts. A mortgage is a large loan to borrow, and for that, the lender needs protection in case the borrower defaults on their loan. In case the borrower doesn’t fulfill their obligations, the lender uses the borrower’s house as collateral by foreclosing on the home and selling it for payment.
When you die, your estate takes responsibility of paying back your remaining debts. Because mortgages are secured debts, those lenders will get first dibs for creditors to receive payment, compared to let’s say a credit card, which is unsecured.
If you want to leave your home to someone, make it clear in your will. If your mortgage isn’t paid in full, the heir will take that responsibility as long as they can afford to pay for it.
It’s not uncommon for one spouse in a marriage to pass away before the other. And odds are you owned your home together. Sixty-five percent of recent homebuyers are married, according to the National Association of Realtor’s 2018 Buyer and Sellers Generational Trends report. That means most deceased homeowners are likely married at their time of death.
When one of the spouses dies with an outstanding mortgage, the survivor fully takes over the mortgage. But it is possible your spouse has the only name on the mortgage. If so, then they need to leave the home to you in their will. If they don’t, the rest of the family could find themselves in a pinch.
Whether you are a joint homeowner — or are set to inherit the home — you will be responsible for your spouse’s mortgage debt after they die.
Just because you never married, it doesn’t you mean you can’t leave your home to someone important to you. Make it clear in your will if there is a specific beneficiary you’d like to see take ownership of your home.
If not, your estate will pay out the debt that is left. If there aren’t enough funds in your estate to cover your mortgage debt, your lender is out of luck. They can’t squeeze blood from a turnip.
When that beneficiary takes ownership of your home, they also take ownership of the mortgage. Following your death, they will contact the lender notifying them that they will be taking over the mortgage.
There is a chance they may not actually qualify for a mortgage on their own. But if they’re able to keep up with your original mortgage payment, they’re allowed to keep the home. Once the home is in their name, they can do as they wish with it.
They can refinance your home (usually for better interest rates). Or, if they can’t afford the mortgage and your estate is unable to pay off the balance, they can leave the house for the bank to foreclose on it.
Here is another example of a secured debt. If the borrower doesn’t keep up with their monthly bills, the lender can repossess the vehicle. If your spouse purchased a new vehicle shortly before passing on, odds are they left behind an auto loan.
There is one definite way you will end up with your deceased spouse’s auto loan tab. And that way comes down to one question: where do you live?
There are nine states in the U.S. where laws mandate that married couples split half of their assets and half of all debts. They’re called community property states. And if your spouse financed a $20,000 vehicle, you are responsible for half of the car’s loan balance. This only happens if the loan was taken out during your marriage. Those states are the following…
…If they die owing a balance of $18,000, you’re responsible for $9,000 of that debt.
In any state, regardless of where you live, if you cosigned on your deceased spouse’s auto loan, then you are responsible for paying it back in full.
If you were the only account holder on the card, the debt is yours alone. Only the estate can be held liable to pay off the remaining balance. Once the estate is closed, credit card debts can’t pass to your heirs.
The estate’s executor is responsible for notifying all credit card companies that the account holder has passed away. This closes the accounts to avoid additional interest charges. It’s also the responsibility of the executor to officially close the account.
To do that, the executor will need to send a registered, certified letter in writing. On top of that, the credit card company will usually request a death certificate. This is why if you’re someone’s executor, make sure to get as many copies as possible of the death certificate. You’re going to need them.
Following this, the executor needs to notify the Big Three credit bureaus of the account holder’s death.
Big Three credit bureaus:
This is important to ensure the credit report is flagged as “deceased.” Fraudulent credit cards cannot be opened in the deceased person’s name.
For the most part, no. Only the estate of the deceased person takes responsibilities of debt. There are a few situations where you could be on the hook, though.
One instance where you’re always going to be responsible for paying your spouse’s debt is when you are a joint account holder or cosigner on the credit card. Or, when they have outstanding credit card balances, and you live in a community property state.
There are nine of them in this country. If you live in one of these states, both partners in the marriage take 50/50 ownership of all assets and all debts. So, if your spouse dies, you inherit half of their debts along with half of their assets.
There is a possibility that someone else will take responsibility for your credit card debt after you die such as a joint account holder or cosigner.
The biggest difference between an authorized user and a joint account holder comes down to who is legally obligated for the credit card balance — even after death.
The authorized user accepts zero legal obligation to the debt. If the credit card holder passes while the two share an account, the authorized user can walk away from the debt. Just make sure you don’t try to make new charges to the account, especially after the executor informs the credit card company that the account holder passed away.
Now, this isn’t the same case for a joint account holder or a cosigner.
A joint account holder is jointly responsible for debt. With cosigners, the cosigner accepts as much responsibility as the primary holder. In that sense, the credit card issuer can go after the cosigner the same as they would the primary.
If there is still an active balance when the primary account holder dies, both a joint account holder and cosigner would be responsible to pay it.
If you’re the executor of the deceased’s estate, it’s important for you to ensure any authorized account users are notified of the primary account holder’s death. And that they can no longer make charges with the credit card.
Using a deceased person’s credit card — even if authorized to do so — is considered fraud. This doesn’t apply to a joint account holder; no changes will be made in the way they use the account.
Determining whether your student loan debt will get passed on to your spouse or other family members really comes down to what type of loans you have.
Student loans are lent out uniquely. Some are administered by the federal government through the Department of Education, while others are from private banks and financial institutions.
The biggest difference between these two types is the interest rates. Federal loans tend to have lower interest rates, while private lenders set the interest they charge.
Student loans obtained through FAFSA from the Department of Education do not need to be paid back following the death of a borrower.
Just like credit card issuers, student loan servicers need documentation with a death certificate to prove the borrower’s death. The Federal Student Aid website does outline that acceptable documentation includes:
If a borrower dies, their federal student loan debt dies with them.
The Department of Education cancels the debt, and it is discharged by the loan servicer. You will need to fill out what is called a Death Discharge to officially notify the Department of Education that the borrower has passed away.
You can answer this question with a question:
Was there a cosigner on the loan?
It’s rare to see a federal student loan borrower need a cosigner, however, private loans often require a cosigner. A clear majority (90 percent) of all private student loans have a cosigner, according to a 2014 report from the Consumer Financial Protection Bureau, the most recent data available.
If the primary borrower of a private student loan dies, the cosigner may very well find themselves responsible for repayment.
This does not apply to all cosigners. Not all private student loan lenders have the same policies when it comes to the death of a borrower. The outcome of this scenario may vary depending on the lender and details of the loan.
If you’re a cosigner on a private student loan when someone passes away, make sure to read the lending agreement carefully to determine what happens if the primary borrower dies. If you’re still in doubt, call the lender to ask.
Not all debts passed after death involve being married. Here is a debt that may be passed from a child to a parent — but in a way that you may not expect. The same rules as other student loans apply, but these loans are different than your typical direct federal loans.
Graduate and professional students are eligible to take out PLUS loans. The acronym PLUS stands for Parents of Undergraduate Student loans.
So, parents take these loans out for their undergraduate students — without a cap on how much they can borrow — but an undergraduate student is not eligible to borrow this type of loan without one of their parents involved. When the child of PLUS loan dies that PLUS loan is canceled through a Death Discharge application.
If it’s the other way around and the parent passes away, the child (student) can put that loan to rest with a Death Discharge application. It’s possible the student dies while having an outstanding PLUS parent loan. In that case, the debt dies with them, and the parents are not responsible for the debt.
If there are two parents cosigned on the loan and one of the parents dies, the surviving parent will take responsibility for the loan repayments. Yes, the debt dies with the student, however, the parent of the borrower may find themselves with tax debt after the loan is discharged by the federal government.
You may be wondering how does that work?
The IRS may find that Parent PLUS loan to be an additional source of income. In that case, it can send the parent what is called a 1099-C, or a cancellation of debt form. If this happens, the IRS considers the loan as an increase to your income. And you are responsible for paying the taxes on the loan amount, unless you qualify for an exemption.
Medical debt doesn’t just vanish after death for some people. There have been cases where family members have inherited medical debt of relatives. It’s very uncommon, though. And depending on what state you live in, you may never have to worry about paying the medical debt of a deceased family member.
A very old law called filial responsibility is occasionally enforced in some states. Filial responsibility refers to laws that require adult children to repay medical bills that their parent or parent’s estate can’t afford.
Most states don’t impose these laws. However, there have been cases where hospitals and nursing homes have sued adult children to repay what they’re owed.
If your parents were in a nursing home, or received long-term care up until their death, and were unable to pay for the costs — you may end up stuck with a bill. Again, this is rare to happen.
This comes down to what state you live in, and your unique situation. Remember, this article is simply an informative guide and not legal advice.
Article last modified on August 12, 2019. Published by Debt.com, LLC