Here’s what happens to your debts when you die – Forbes Advisor
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One of the main reasons for having life insurance is to help you pay off your debts when you die. You don’t want to impose expenses on your family that they might not be able to afford without your financial support.
But do you need a life insurance policy with enough death benefit to cover? all you have to? Not necessarily.
It is important to know how the various types of debt are handled after death. This will help you determine how much life insurance you need to cover debts that need to be paid.
How Debt Is Managed After Death
Debt doesn’t just go away when you die. But that doesn’t necessarily mean that someone else has to find a way to pay off all of your debt. Creditors can collect what is owed from your estate.
Typically, creditors have a certain window of time after your death and once the probate process begins submitting claims for what you owe, says Josh Berkley, Estate Planning Lawyer at Berkley Oliver PLLC in Kentucky.
Probate is the legal process by which the assets of your estate are distributed and debts are paid. Property and assets that were in your name only are considered part of the estate and can be used to pay off your debt, says Berkley.
However, there are situations where your loved ones may be responsible for paying off some of your debts.
• If you have a co-signer on a loan or line of credit, the co-signer will be responsible for paying off the debt after your death.
• Your state’s law may require your spouse to pay certain debts.
• If you live in one of the community of property states, your spouse may need to use property that you owned jointly, rather than property that was only in your name, to pay off your debts. Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin are common law states. Alaska has a voluntary community ownership system.
The type of debt you have can also affect whether it will need to be paid after you die. Here’s how these common types of debt are typically handled.
What happens to mortgage debt
If you and someone else like a spouse or partner have taken out a mortgage together, what happens to that debt is simple.
“The surviving borrower is responsible for the loan,” says Leslie H. Tayne, a New York debt settlement lawyer. If you do not want to leave the co-signer responsible for the remaining balance, a life insurance policy can help cover the cost. So take the amount owed on your mortgage into account when calculating the amount of life insurance you need.
If there is no co-signer on the mortgage, no one has to assume the obligation. However, this does not mean that your family can inherit the property freely. If they want to keep the house, they will have to take responsibility for the loan, Tayne says.
Even if they want to sell it, they will have to keep making mortgage payments until the house is sold. And the remaining mortgage debt will have to be repaid once the house is sold.
If no one takes over the mortgage after you die, the bank can foreclose the property, Tayne says. He can then sell it to recover the amount owed on the mortgage.
What Happens To Credit Card Debt
If you have any credit card accounts with a joint account holder, the co-owner will have to pay any balance in the account.
Be aware that a co-owner is different from an authorized user whom you have authorized to use your credit card. An authorized user will not be responsible for your credit card debt. If you have credit card accounts in your name only, the credit card companies may ask to be paid through your estate.
“If there is no estate, no will, and no assets – or not enough to pay off those debts after death – then the debt will die with the debtor,” says Tayne. “Children or other family members have no responsibility to pay debts. “
What Happens to Student Loan Debt
You’re in luck if you have federal student loans for they will be released if you die. This means that they will not have to be paid. Any PLUS loan your parents took out to pay for your college education will also be forfeited if you die. A family member will need to provide your loan officer with a death certificate to prove your death and to pay off the loans.
You are not so lucky if you have private student loans.
“There is no official discharge for private student loans, unlike federal student loans where the debt dies with the debtor or the student borrower,” says Tayne. If the loans are in your name only, the assets of the estate can be used to pay off what is owed if the lender does not pay the debt.
If you have a co-signer of a student loan, that person will be responsible for what is owed. In fact, some lenders include clauses in their contracts that require the balance to be paid immediately upon the death of a co-borrower, explains Tayne.
Of course, a life insurance payment could be used to pay off what is owed. However, the co-signer might be able to negotiate with the lender to change the contract after the death of the other co-signer. It might be helpful to work with a debt relief lawyer who has experience negotiating with lenders in this situation.
What Happens To Auto Loan Debt
Your family will have a few options for dealing with any debt you had on a vehicle:
• They could let the lender repossess the car if they don’t want it.
• They could sell the car to pay off the loan.
• Or they could keep the car by continuing to pay what is owed on the loan.
However, they will likely need to qualify as a borrower to maintain loan terms or apply for a brand new loan, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.
Of course, if there is a co-borrower on your car loan, that person will be responsible for the loan. This is another debt that you should factor into your calculations when determining how much life insurance to buy.
What happens to the medical debt
Unfortunately, medical bills do not go away when you die. The healthcare provider or collection agency will have to decide how to get the money back. If you only owe a small amount, the vendor may declare the invoice uncollectible and close the account, McClary explains. If you owe a lot, he might try to collect what is owed from your estate.
Medical debt is the only type of debt where there is usually no co-owner. The patient is responsible except in situations where the patient is a child. Then the parent would be responsible for the bill, McClary says. For such situations, a life insurance policy on a child could help cover the bill.
Add up your debts
Consider all of the types of debt listed above to determine the amount of life insurance you need.
Keep in mind that while your family may not have to use their assets to pay off what you owe, any assets that need to be taken out of your estate to cover your debts will leave less for those around you. Rather, a payment from a life insurance policy could be used to cover your debts so that your property does not have to be sold and your assets do not have to be emptied.
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