A loan can be a lifesaver when you need huge cash for urgent expenses or when you are broke. But, a loan can as well be your nightmare, especially when paying back what you owe becomes difficult. Regardless of what happens, you are required to pay back a loan. And you trust creditors to adopt any necessary legal means to compel you to pay what you owe. However, what if you pass on? Would your debt be erased? Or will your creditors go after beneficiaries?
In most cases, the beneficiaries of an estate, including the surviving spouse, aren’t responsible for paying the debt owed by a deceased debtor. The responsibility falls on the estate executor, who is usually in charge of the deceased estate during probate.
It is often said that nothing is certain but death and taxes. But I feel it is quite logical to include some types of debt as well. Normally one would think that death is a perfect escape from debts. However, this isn’t true. Whenever a loan is offered to you, a creditor expects you to pay, regardless of what happens or the situation you find yourself in. But what if you pass on? Can creditors go after your estate beneficiaries? Here is one question several individuals need an answer to. If you are among such individuals, you’ll find out.
Can Creditors Go After Beneficiaries?
Seeking a loan is one of the best moves you can make, especially if cash derived from the loan is spent wisely. In fact, it might interest you to know that many individuals on the coveted forbs richest list took out loans to scale up their business. So taking out a loan to start a business, consolidate other loans, buy a car, fix a damaged roof, or plan your wedding isn’t bad.
While taking out a loan is considered a good move (especially if it is done wisely), paying back may be difficult if you fail to draft a repayment strategy. Or if you end up borrowing more than you need and lavishing the money on unnecessary things.
If you default on a loan, you trust the creditor to adopt several tricks to ensure you pay up. First off, they may raise the interest rate. Later, they may slap you with late payment fees. As a last resort, your creditor may sue you in court to garnish your wages or bank account.
But…. what if a debtor passes? Does it mean he or she is free from paying a debt? If no, who pays the debt?
Who Takes Responsibility for Your Debt When You Die?
Debts normally become the responsibility of your estate after you die. Your estate is everything you own at the time of your passing. The process of paying your bills and sharing what is left is regarded as probate.
The executor of your estate—the individual responsible for handling your will and estate after your demise—uses your assets to settle your debts. This might include writing checks from a bank account or selling property to get the money.
If there aren’t adequate funds to cover your debts, creditors generally are out of luck. However, this also might mean that your debts consume your assets that you had hoped to leave to decedents.
And in some situations, family members could be responsible for your debt. Understanding how your debt can impact your loved ones is important.
Who Can Inherit Your Debt?
After you pass, the following four parties could become liable for your debts:
- Co-signers on a loan
- Joint owners or account holders
- Spouses in a community property state Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Community property from a marriage can be put toward debt obligations. However, spouses aren’t liable for debts that were taken out before the marriage.
- Individuals tasked with settling the estate’s debt: Who didn’t adhere to probate laws.
What Creditors Can and Cannot Take?
Creditors cannot go after some assets such as your retirement accounts, living trusts or life insurance benefits to settle debts. These assets go to the named beneficiaries and aren’t among the probate process that settles your estate.
You can use a life insurance policy to help loved ones cover debts that could be transferred to them or simply ensure that they have money after your passing.
Worthy to note is that if your policy’s life insurance beneficiaries are no longer living, the death benefits may be transferred to your estate and subject to creditors. One way to prevent this is to keep your beneficiary information updated.
Under Federal Trade Commission rules, debt collectors can reach out to a deceased person’s spouse, parent, guardian, executor or administrator to talk about the debt. However, collectors can’t deceive family members into thinking they are liable for paying debts if they aren’t.
Your family members have the authority to prevent a debt collector from contacting them. However, if they are liable for the debt, they are still required to settle it.
That said, in a nutshell, in most cases, individual debt isn’t inherited by their spouse or family members. Instead, the deceased individual’s estate will settle their unpaid balances. Put differently, the assets they held when they died will go towards paying off the debt owed when they died.
Can a Beneficiary Be Responsible for a Debt?
Normally, when you take out a loan, you are required to pay it back during a given timeframe. But sometimes, certain situations may stop you from fulfilling your obligation. When that happens, creditors will track all legal tactics to ensure that you pay what you owe. But, if you eventually pass on, who will pay your debts? Will your beneficiary be responsible for your debt?
Beneficiaries are typically not responsible for a debt unless they had a joint loan or agreement of provided a loan guarantee. If that isn’t the case, the debt is paid off from the deceased debtor’s estate.
To avoid any issue that may arise from unpaid debt after your passing, it makes sense to contact an estate planning attorney to plan your estate.