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Death and Debt: How is it Handled?

Many people don’t like to discuss death or dying, but it is a given for all of us. When someone that we love dies, it can be quite a sorrowful and sad situation. We have to keep focused, though because there will be financial issues to handle and someone has to do it. In a perfect situation, it would be best to have all finances in order before anyone dies. In this article, we are discussing what should happen in the event of a loss like this.

When Someone Dies

Debt does not go away completely when someone dies, unless the person was totally responsible for his or her debt while alive. However, if a spouse or adult child is left behind, the debt might still be a problem. It is best for everyone’s sake to have clear instructions in place for the inheritor of any of your finances. Things should be set in order such as life insurance and estate planning.

The Debt

When you pass away, your estate becomes available to family members who will be responsible for your outstanding debt. The estate’s executor, which is the person assigned to legally handling your estate should you pass away is supposed to ensure that all your debts are repaid. Most of these debts have to be paid back as long as sufficient funds are in the estate. Some of the debts in question are:

  • Auto loans
  • Private student loans
  • Credit card balances
  • Lines of credit
  • Mortgages

The Mortgage

If you have a balance on your mortgage upon your death, the process can get quite complicated. How? Well, your estate would pay the entire balance of the mortgage, if there is enough money. However, if the inheritors want to keep the house, they can do so, but with the premise that they would have to make the monthly payments out of their pocket or use the money left in the estate to do so. In some cases, the life insurance policy can pay off the mortgage. But, so that there is no confusion, it is best to make that stipulation as part of the estate instructions or in your living will. You can have the surviving spouse or relative; for example, take over the mortgage, especially if the person’s name is on the deed. However, the lender has to be notified of this. This is true if the person does not qualify for an approved mortgage on their own.

Selling the Home

The survivors can also sell the home or they can just walk away from it all, especially, if no funds are left to cover the mortgage and if they cannot afford to do so. The bank will eventually foreclose on the home, but for a deceased person, a damaged credit is not an issue. However, if a surviving spouse is on the mortgage, it could pose a problem. It is best to speak to the lender about the situation before making a decision to walk away.

More Responsibility

If any survivor is a cosigner on any of the deceased person’s debt, they are responsible to pay. If you are an authorized user on a credit card, you are not liable. However, you could hurt your credit score if the debts remain unsettled. Contact the lender and ask that you be removed as an authorized user before the account is reported to the credit bureau.