Who is going to pay your debts? If any mishap occurs and you die with any unexpected reason then debt can easily eat up all your assets either gradually or instantly. Even in some scenarios you family behind can be on the edge to pay your debts after death. Life insurance is the solution which many people opt for to leave something for their loved ones behind and also to deal with any leftover debt.
Your estate is basically everything which will cover your debts after death and it includes everything you own at the time you die. The process of paying the final expenses, bills and other distributions is called probate.
The person who is responsible to execute that probate process or to deal with your estate after your death is known as the executor. He has the full authority and right to pay off your debts and use your assets and can include writing checks on a bank account, selling the property or other assets. If you don’t have enough funds in your estate then its an unlucky event for creditors.
Debts after death – Scenarios & possible solutions
However, some types of debts can be troublesome for your family members. Such things then become the burden of your family and you can get details about it from the below options. Such loans include;
- Home equity loan
- Credit cards
- Car loan
- Student loans
Mortgage: If the home is under joint ownership then after your death the co-owner will have to pay off the mortgage. On the other side executor can pay-off the mortgage out of the estate if there is no joint ownership. If there are not enough funds available then family members who inherit the house will take over the payments.
Home equity loan: If you inherit a home from your ancestor, then you must have fulfilled all the left overpayments in terms of a home equity loan. Otherwise, the lender has the option to sell the house or simply transfer it to another owner while taking over the remaining payments.
Credit Cards: In such scenario where the estate is run out of funds and still there are credit cards balance to pay off, then companies will not get that amount as it’s not secured just in case with mortgages and car loans. However, a credit card with joint ownership certainly leads the other person to pay off the bills. In another case with community property, spouses are effectively responsible to pay off the debt which includes credit card balances.
Car Loan: Similarly, the executor can simply cover out the debt from the estate. In another case, the person who inherits the car or another automobile can continue to pay off the debt and lender will be happy with that. In adverse case, the lender has the right to repossess the vehicle if no one is paying the balance.
Student Loans: A student loan is an unsecured loan, but debts after death will pay off such balances from the estate. However, if there is no asset for that purpose then there is no obligation. On the other side if there is any co-signer in the application then he/she will be responsible for the balance and if it’s incurred after marriage then spouses are responsible for that. Moreover, federal student loans are simply terminated upon death. Similarly, if a parent is holding the federal PLUS loan account, then balance will be terminated on either death including parent or student. Some private lenders do also waive-off the balance on student loan debt after death including Wells Fargo and Sallie Mae.
What is protected from creditors in such case?
Generally, creditors are not able to go after the life insurance benefits or retirement accounts. Such benefits do not contribute towards the estate and neither becomes the part of the probate process. The sole objective of such insurance policies is to offer benefit to your family and protect such payments from creditors.
However, there are some Term life insurance policies which offer some extra benefit on death for a given number of years. You can select such options if you like.
Another thing to keep in mind that always keeps your beneficiary info updated. If the beneficiary is not alive after your death then insurance benefits will become part of your estate and the probate process of course.