Debts have become an integral part of living in the U.S. The total household debt is increasing by leaps and bounds: it has already hit the mark of 13.2 trillion dollars. The precipitous sum, though shared by millions, dominates the minds of many, preoccupying them with finding ways to pay the bills and, in some cases, make ends meet – or proceed with another nifty ahem-phone costing a bomb.
The majority of Americans die with debts as part of their legacy. Almost three-quarters leave behind huge debts, with the average of $61,554. The question arises: who is left holding the baby?
Where there’s a will…
Regardless of whether there is a will written, the debts with which the person who has passed away was burdened are subject to being paid off using the assets of the person’s estate. The term denotes the aggregate of your belongings, such as houses, cars, furniture, savings, etc.
If there is a document stating whom you chose as an executor to handle all these issues, it will be up to this person to decide what to do with the remaining debts. Should you fail to write it, the state will look for your relative (usually a spouse) to act as an executor. In the event that no such person is found, your debts are paid off using the money from your estate, and the remainder is transferred to the federal budget and received by the state.
Provided an executor is found, this person will be held accountable for managing the remaining estate to pay the debts. His or her duties include negotiations with creditors, selling the person’s property to get the money the creditors demand, etc.
Do relatives have to pay off such debts?
No. No family members are usually charged anything, except for cases when they co-signed with them on some of the debts or are joint account holders. Even spouses, who are the closest relative, are not held responsible for these debts if their names are not listed along the name of the indebted as the one responsible for it.
Still, there is one more important exception that is worth mentioning: in community property states, spouses are often held liable for property debts. Among these states are Texas, Arizona, Washington, New Mexico, California, Idaho, Wisconsin, Nevada, and Louisiana.
What if the assets are not enough?
If the estate assets are not enough to cover all the debts left, creditors can seize the object that had been purchased on account. In this case, the executor has several options to choose from.
If it’s a home equity loan, it is either reclaimed by the lender (if agreed by the heir), or the executor can sell the half-bought house, pay off the part of the mortgage that remains, and keep the money that is left after the debt is paid off.
If it’s a car, it is either reclaimed, or the executor can agree to keep on making payments and keep the car.
It is a bit more complicated when private student loans are also unpaid. Since there is nothing to seize, the heir should try to pay off as much as they can using the estate assets. However, if they prove to be not enough, the creditors will have no option but to forgive it.
Can they take ANY part of my estate?
No! There are two things that are not touched: the first one is your life insurance (your beneficiaries will get what you left them), and the second one is retirement accounts. Neither is given to creditors should you pass away with unpaid debts. This is why life insurance policies are so valued among Americans. However, in cases when the beneficiary dies before they had an opportunity to receive the money, it can be used to pay off the remaining debts.