In general, when a loved one passes, his or her debts fall to the estate to be paid. However, in situations where debt is shared — for example, jointly owned credit cards or shared student loans — the debt can pass to the account co-owner, even if he or she was unaware of the debt.
This is why it is important to consider debt planning as part of your overall estate planning process. Here are some tips on dealing with the debt of a deceased loved one:
Get informed. By law, everyone is entitled to one free credit report every year from the three major credit reporting agencies: Equifax, Experian and TransUnion. Spouses should obtain and share their credit reports with each other so they are informed about any debt issues that could impact their estates. If debt will potentially impact adult children, be honest with them about your financial situation as well.
Get advice. Seek the counsel of trusted attorney or other financial professional on your debt issues and learn how to resolve them. Deal with personal debt before it spirals out of control and becomes a potential issue for your family.
Get organized. Ideally, all of your estate and financial planning documents should be kept together in one place where your family knows where to find them. Among these documents should be an updated list of current assets and debts, including financial institution information, account numbers and passwords.
Get educated. Heirs should educate themselves about what types of debt will need to be repaid and what types may be cancelled or forgiven. Generally, any unsecured debt held in the deceased person’s name alone (such as credit cards, student loans, etc.) will be discharged. Be aware, however, debt collectors do have the right to attempt to collect on these kinds of debt — and may contact survivors to try to “guilt” them into paying. Being educated about liability for debts after the death of a loved one will arm you with the knowledge you need to respond to each situation appropriately.
If you’d like to learn about protecting yourself and your family, call us to schedule a Family Estate Planning Session so we can help you identify the best strategies to provide for and protect the financial security of your loved ones.