What Happens To Debt After The Borrower Dies?
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Good Nelly, from My Way Of Viewing, has several prior contributions as a guest poster on this website.
Her latest submission addresses a subject we don’t like to think about, our own demise.
However, if we truly have loved ones we care about, we must prepare for the inevitable and make this difficult time transition as smoothly as possible for them when we do pass on.
Part of the transition period involves important financial considerations.
Some of us are lucky and will be completely debt-free when we die.
This post focuses on those individuals who are not so fortunate.
[Disclaimer: We have no financial relationship]
What happens to debt after the borrower dies?
Do you know what is worse than having your own debt?
How about being responsible for settling someone else’s debt?
That situation can very well happen to a beneficiary who may inherit the debt left by the decedent.
A study conducted by Experian, a major credit bureau, found that about 73% people in our country are likely to die with debt.
So, what actually happens to the debts after the borrower dies?
Does his/her family members have to bear the debt burden?
Well, not always.
Are debts forgiven after a person’s death?
Well, not always.
Let’s discuss situations when the beneficiary/beneficiaries might have to worry about the debts of the deceased person.
After the death of a person, the estate is responsible to take care of the debt.
The estate is an accumulation of all the assets a person leaves behind.
It consists of any property such as real estate, any bank accounts, investment accounts, vehicles, and valuable personal properties like jewelry and artwork.
The debts of that person are, unfortunately, also considered to be a part of the estate.
How the assets and debt of an estate is handled is primarily the responsibility of the executor of the estate.
If the deceased has a will, there is already a named executor.
If the decedent never created a will, an executor will be appointed by the court.
The executor is initially charged with selling off assets to pay back debts as per law.
After the creditors are paid, the remaining assets are only then distributed to the beneficiaries/heirs.
What happens if the entire value of the assets does not cover the debt of the estate?
In the majority of cases the beneficiaries will not be responsible for the balance of debt remaining.
The exception to this is if the beneficiary happens to be a joint account holder/co-signer of said debt.
In that instance remaining debt would be transferred in its entirety to the joint account holders who will then be responsible to pay off the balance.
What happens to secured debts like a mortgage or car loan?
Well, in this case, if the borrower inherits the property, then he/she has to bear the mortgage payments if he/she wants to stay in the house or keep the vehicle.
Otherwise, the trustee can use the estate to repay the mortgage loan.
In case there is a joint homeowner, he/she is responsible to make the payments.
Federal law does offer some protection as lenders can’t pressure the joint homeowner to make the payments immediately after the death of the co-owner.
What about student loans?
No one has to repay any federal student loan after the borrower’s death.
But, in the case of a private loan, if there is no co-signer (who would then assume responsibility), the estate is used to satisfy the remaining loan amount.
Certain lenders like Sallie Mae may sometimes forgive the student loan.
In the case of a PLUS loan, the loan becomes dismissed in the event of the death of either the student or the parent.
Ways you can provide benefit to your heirs.
As a borrower, the goal should be to not burden anyone with your debts after you are gone, especially while they are grieving.
Your debts are, after all, your debts.
So what can you do?
You can always make effort to fully repay the unsecured debts prior to your demise.
Are you struggling to manage your multiple credit cards bills?
In such a situation, it may be best to consolidate the debt and begin repayment, so that your family members don’t have to worry about the unpaid unsecured debts in your absence.
Having all the debt in one entity may also help ease the transition financially as heirs do not have to hunt and dig through the paperwork from multiple lenders.
Purchasing a life insurance policy or a credit life insurance policy can also be beneficial to help pay off both secured and unsecured debt.
The minimum coverage amount should be enough to take care of the balance of your debts.
It is preferable to purchase a life insurance policy since the beneficiaries can not only satisfy the debt but also set aside the remaining proceeds for future benefit.
If instead you choose credit life insurance, the policy will pay just the amount to satisfy the loan balance.
What documents should you fill out to help your beneficiaries?
You need to fill out certain documents so that your beneficiaries can obtain what is rightfully theirs without the extra cost of going through probate.
You need to sign a will outlining your beneficiaries and how you wish the assets to be distributed.
You need to assign a power of attorney and sign a contract so that the person can make important financial decisions on your behalf.
If there are special requests, then you will need to sign a Letter of Intent outlining your personal preferences.
You can also create a trust, especially if the beneficiaries are minors or not financially responsible people.
[Another wonderful resource that is available is the In Case Of Emergency Binder .
This well designed resource gives you the ability to document important financial accounts, etc that will allow your heirs to have this vital information at their fingertips and make the transition process smoother]
By following these simple steps, you can significantly ease the financial stresses that occur with your demise which can benefit the grieving process.
If you enjoyed this content by Good Nelly, feel free to visit her blog for her other articles:
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