Q. What happens with outstanding debt after the death of the borrower? Will spouse, children, parents, or next of kin be responsible for it?
A. In short, if the deceased possesses debt after death, it is their estate that is responsible for the payment of creditors. Family and relatives are not responsible, unless in specific situations such as having been a co-signer or joint account holder of the debt.
Nowadays, almost everyone is in debt, and many are concerned with the nature and burden of these debts left upon their loved ones if they died before paying off these debts. Aside from the grief and tragedy of losing a beloved, surviving family members may even be harassed by a variety of creditors. In most cases the family of the deceased will not explicitly have to deal with debts of the deceased.
Once a person dies, it is their estate (consisting of all the things they owned whilst alive like a house, car, cash, etc.) that is responsible for the repayment of these debts, and whatever is left in the estate would then be passed onto the heirs dictated by a will, if one is present. Family members may still be troubled by phone calls and letters of creditors, but they are not lawfully obligated to pay these debts, unless they are listed as a co-signer or joint account holder.
Credit card debts are considered untethered or unsecured loans, and since it is not tethered or secured to an asset, if the borrower dies the credit card companies are almost at the back of the line in receiving payment from the remaining estate. Tethered debts, or secured debts, are loans attached to an asset such as a house or a car. They require monthly payments, and will still need to be made by the deceased’s estate or heirs, otherwise the creditor may seize the property. It is highly recommended that upon the death of the individual, family members and those representing financial management of the deceased contact the crediting companies and banks and provide them with a copy of the death certificate (this is why you should order multiple copies). This will help the company confirm the death of the deceased, and often times they will stop charging interest at that point.
If a person happened to die broke, and their remaining estate is not enough to cover the charges of their outstanding debt, the estate is declared “insolvent” and creditors of untethered debt will have to relinquish all repayment obligations. This is only applicable to unsecured debts. Mortgages and car loans are still tethered to assets and must be paid, or you risk losing those assets.
For the family of the deceased, there still exists the benefits of untouchable assets. These assets, such as 401(k) or 403(k) accounts, brokerage accounts, and life insurance policies, are ones that creditors cannot have access to. These accounts have designated beneficiaries and the money from them go directly to those stated persons without ever passing through the estate, and avoiding creditors as a whole.
To read more about outstanding debts after death, see the following articles:
Dying With Debt: Will Your Children Inherit Your Obligations?
Credit Card Debt That Outlives Mom
FTC proposes new guidelines for collecting debt from dead people
