Coping with the death of a loved one is difficult enough without the added stress of dealing with financial matters. Whether you’re a spouse, parent, child, or friend, the emotional toll could be compounded by worries about finances. Here’s a touch of good news. While you may have to help handle the deceased’s financial affairs, many debts aren’t passed on.
Here’s a quick summary of how various scenarios are handled, and we’ll dig deeper into the details below.
|Scenario||Will you be responsible?|
|You didn’t cosign anything, and the deceased isn’t your spouse||Likely no|
|You’re responsible for handling the estate||Likely yes, but using the estate’s assets not your own|
|You cosigned a financial obligation, or have a joint financial account with the deceased||Likely yes|
|The debt was taken on by a spouse or domestic partner while you lived in a community property state||Likely yes|
Some Basic Info
The deceased’s assets are often what’s used to settle unpaid bills, and collectively the person’s assets and liabilities make up their estate. Debts don’t disappear when someone dies, but the creditors could be limited to collecting payment from the person’s estate. Some assets might be off limits as well. For example, life insurance policies and retirement accounts could pass money on to a listed beneficiary outside of probate and creditors won’t have any claims to those monies.
Debts could go unpaid if there aren’t enough assets in the estate to cover the liabilities—that’s okay and in line with the law.
But First, Get the Estate’s Finances in Order
When someone passes away, state laws and the deceased’s will (if there is one) will determine who gets the job of keeping the estate’s finances in order. The named person could be known as the executor, personal representative, administrator, or universal successor. Among other responsibilities, this individual will help execute the will, create an estate bank account, close out the deceased’s financial accounts, and work through the probate process when it’s necessary.
If this responsibility falls on your shoulders, you could start by creating a detailed account of financial concerns and sources of assets or debts that will need to be addressed, including:
- Funeral service and burial costs
- Estate, will, and trust matters
- Taxable investments, including brokerage accounts
- Tax-advantaged retirement accounts, such as IRAs, 401(k)s, or 403(b)s
- Income and employment matters, such as Social Security benefits
- Tax-related documents
- Current bills
- Miscellaneous expenses
Having a list of assets, liabilities, and other obligations can help you sort through what needs to be done in the coming weeks. In some cases, you may need to work with an attorney, accountant, tax advisor, or financial institution representatives to get all the documents in order.
The executor or administrator of the estate should send the death certificate to the deceased’s banks, credit card issuers, insurers or annuity companies, government agencies, credit reporting agencies, and membership organizations. The U.S. Department of Veterans Affairs has a checklist you can use or share with the executor.
A funeral director might be able to order certified death certificates for you, and you can request additional copies from the county clerk recorder or state. Order more certified copies of the death certificate than you expect to need so you’ll always have one on hand.
Assess any Debts
Once the estate is in order and you’ve taken care of these basic housekeeping items, you’ll want to take a closer look at any debts to determine if you or other family members will be responsible for covering the costs.
Determine if You’re Liable
While many debts don’t pass on to relatives or friends, there are several circumstances in which you might be responsible for repaying the deceased’s debt.
Did you cosign a loan?
If you cosigned a loan, lease, mortgage, credit card, or other types financial obligation with the deceased, you’ll likely be responsible for repaying remaining balances and fulfilling the obligations.
If you are an authorized user, rather than a cosigner, then you should be in the clear. Authorized users aren’t responsible for the debt on a credit card account, even for the purchases that they made. When the account’s owner dies, the account should be closed by the card’s issuer and the primary and authorized user’s cards should be deactivated.
Have you lived in a community property state with a spouse?
According to the IRS Publication 555, community property is property “that you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or your registered domestic partner) are domiciled in a community property state.” It could also include property you choose to convert to community property and property that can’t be identified as separate.
Community property includes income, savings, and debt, in addition to physical assets. In other words, both partners could be responsible for repaying a loan or credit card debt even if only one person took out the loan or credit card. Stephan M. Brown, an attorney with NewPoint Law Group in Roseville, California, says that in community property states “a surviving spouse is often responsible for the debts of the deceased spouse, but only to the extent that the claims are against community property.”
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states. Puerto Rico is a community property jurisdiction, and spouses in Alaska and Tennessee can choose to create community property with a formal agreement or property trust.
Are there medical bills?
Although they’re not always enforced, some states have filial responsibility laws that could require adult children with the financial means to pay medical bills when their parents are unable to do so. The debt could accrue during the parent’s later years and be left after death. However, if your parent qualifies and enrolls in Medicare, then the filial responsibility generally doesn’t apply.
You could also be on the hook if your spouse leaves behind medical debts. Some states, including non-community-property states, have laws that make a spouse automatically liable for medical bills. However, the state might limit the liability to debt for necessary or life-saving procedures.
What about Outstanding Auto Loans or Mortgages?
The situation could get a little trickier when someone leaves behind a home or vehicle with outstanding debt tied to it. The creditor may be able to repossess the vehicle or foreclose on the home unless you take over the monthly payments. Mortgage lenders generally can’t require you to pay the outstanding balance all at once and can’t kick out a surviving spouse or beneficiary who continues to make mortgage payments while living in the home.
What if you want to sell the home rather than live in it? If the house is underwater, meaning it’s worth less than the outstanding debt on the home, you won’t be liable for the difference, but the estate might be. Creditors (and the state if the deceased received Medicaid benefits) also might be able to place a lien on the home and require you settle outstanding debts before selling the home.
A Debt Collector Could Call – Hold Your Ground
Collection agencies sometimes try to collect a deceased person’s debts from relatives, even when the law isn’t on their side. These collectors may represent traditional banks and creditors, or hospitals and other medical providers. You can inform the collection agency to contact the estate’s executor, administrator, or whoever else is authorized to make debt payments from the estate. If you’re the one in charge, you may want to verify the debt, its age, and whether or not the estate is liable
Hold your ground when a collector is pressuring you to make a payment for a debt you don’t owe. You can send a letter (use certified mail with a return receipt request and keep a copy for your records) requesting the collection agency to stop contacting you regarding the debt, and it should comply. If you continue to receive calls, you can file a complaint with your state’s Attorney General’s office and the Federal Trade Commission.
There are a few cases when debt survives the individual. If someone else cosigned a financial agreement, a surviving spouse has community property debt, or there is eligible medical debt, then some debt may be passed on. However, even then, the debt that’s passed on is limited. In other cases, creditors will collect payments from the deceased’s estate. Leftover assets in the estate can be distributed to beneficiaries, and when there’s more debt than the estate can cover the remainder could be forgiven.