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What Happens to Your Debts After You Die?

5 things loved ones will have to do to settle your accounts

worried woman reading through document with her head in her hands
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| How many times have you told your loved ones that you don’t want to be a burden, and saddle them with a financial mess at the end of your life? It’s a common sentiment.

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Despite their good intentions, however, many people do leave a pile of bills. So, what happens to unpaid bills, and how can you make sure that your loved ones don't have to spend too much time getting those bills paid?

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Better to start a plan now, should you become incapacitated or die prematurely. Doing so will lighten the load for your grieving loved ones who must announce your passing, write your obituary, arrange your funeral, empty your home, and disperse your belongings, among other things.

Following are more tasks to consider. Be sure to consult a financial adviser, estate attorney or CPA for advice, as needed.

1. Start by getting — and staying — organized

If you haven’t done so, compile your most important documents — bank, brokerage and retirement accounts; insurance policies; will or estate plan, living will, power of attorney; and your health care, Social Security and Medicare records. In the process, simplify if you can; multiple bank and credit card accounts can make things more complicated, says Martin Hewitt, special counsel at Fried, Frank, Harris, Shriver & Jacobson, LLP in New York, and a commissioner to the American Bar Association’s Commission on Law and Aging.

Don’t forget your digital assets. Hewett recommends making a list of the account numbers, as well as the usernames and passwords for every online account, including email, e-commerce and social media.

Now, familiarize yourself with both the low-tech (a fireproof briefcase or backpack) and digital options (a thumb drive for your laptop or online document storage service) for storing this vital information. Tell two individuals how to access these records — as well as extra house and car keys — in the event of your death or incapacitation, or a natural disaster. The Federal Emergency Management Agency (FEMA) offers a handy checklist for assembling such materials in its Emergency Financial First Aid Kit (EFFAK).

2. Figure out what you owe

Now, create an honest accounting of every liability you have now, or may have in the future, on a spreadsheet, and update it at least once a year. Include your mortgage, credit cards, personal loans, student loans or medical debts, as well as any loans you may have cosigned for others.

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A person's financial obligations are not automatically forgiven once they've died. According to the Consumer Financial Protection Bureau, in most cases, any unpaid debts are covered by the person's estate — the total assets owned at death. If the individual appointed a personal representative, executor or administrator, he or she is responsible for paying any debts from the estate, including medical debt.

Debts must be settled before heirs receive any money. If there is no will, a judge will decide how the assets should be distributed, and will appoint an administrator to carry out those decisions.

Also, consider your insurance needs. Are you planning to self-fund your long-term care, or should you buy insurance? How will your funeral expenses be covered? “Insurance planning can be buy time for grieving loved ones with debts to pay,” says Greg Giardino, a Certified Financial Planner (CFP) at J.M. Franklin & Co., LLC, in Tarrytown, New York. “When life insurance proceeds are paid out, they usually sit in a safe, liquid account. The beneficiary is provided with a checkbook to use to make withdrawals against the account as needed.”

3. Keep your estate plan current

Your personal representative or executor will be responsible for paying your debts, including medical bills, from those assets. If the debt is in the decedent’s name, the decedent’s estate will be responsible, says Rachael K. Pirner, Esq, a lawyer in Wichita, Kansas, and a fellow of the American College of Trust and Estate Counsel.

There are exceptions, however, so Pirner recommends leaving instructions for your representative to consult a probate lawyer before making any payments. Legal fees can be paid by the estate. “Most state bar associations have a lawyer referral service, which is a good place to start,” Pirner says.

Obtaining legal advice may be wise for other reasons. “Parents are responsible for the deceased minor children’s ‘necessaries’ and spouses for the deceased spouse’s ‘necessaries,’” Pirner says. In other words, goods or services required for sustenance or support of that person. A lawyer can define them for you.

In addition, if you cosigned for a loan, your estate will be responsible. Similarly, if you are a joint account holder on a credit card you will be responsible for any balances on the card. To be clear, a joint account holder is different from an “authorized user,” who is not usually responsible for the amount owed.

Creditors, of course, also have their rights, says Hewitt. “They can file claims in probate [i.e., the legal process of establishing the validity of a will] and can sue any of your heirs if they try to bypass the probate process.”

4. Consider state law

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While statutes differ, in your state, a spouse may be responsible for certain debts. For example, the law may require the estate executor or administrator to pay an outstanding bill out of property owned jointly by the surviving and deceased spouse, such as a joint checking or brokerage account. ​​In community property states — Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — the surviving spouse may be required to use community property to pay debts of a deceased spouse. If there was no joint account, cosigner, or other exception, the estate of the deceased person owes the debt.

What if your debts exceed your estate’s assets? State statute will direct who gets paid and how much, Hewitt says. “An insolvent probate is like a bankruptcy with the unpaid balances being written off by the creditors. On joint accounts, the creditors can generally collect from any joint account holder. Often, the best course of action on an insolvent estate is to turn it over to an attorney or to the court public administrator (if the court has one).” 

5. Instruct your representative to take their time

Fortunately, your estate won’t need to be settled immediately, and things should be done step by step to avoid errors. Some final bills, such as those for medical care, may take some time to come. “Generally, there is a minimum period in state probate law for creditors to present a claim, or let the estate know they are owed money,” Hewitt says. “On average this is between three and six months. If there is more than enough money to pay all debts, they can be paid sooner.”

What about debt collectors? To avoid these calls, your representative should advise any creditors that you have passed, and that they are working on settling your estate. If reasonable progress is being made, most will be understanding, says Pirner. “By law, if the estate is filed for probate, the creditors need to file claims, and will do so. If a creditor persists, and the debt is in the decedent’s name only, your representative should consult a lawyer.”

Patricia Amend has been a lifestyle writer and editor for 30 years. She was a staff writer at Inc. magazine; a reporter at the Fidelity Publishing Group; and a senior editor at Published Image, a financial education company that was acquired by Standard & Poor’s.

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