Debt After Death: Estate Planning Basics
The death of a loved one is a traumatic and agonizing event. It’s also an event each of us will probably face during our lifetime. The emotional toll, managing the funeral, arranging the memorial and then, the phone rings. It’s a creditor, demanding payment on a bill your loved one owed. Do you owe it? What is and isn’t the legal responsibility of family left behind?
First and foremost, there is a division between what the estate is responsible for and what the survivor(s) are responsible for. All debts left by the deceased are the responsibility of their estate. The executor of the estate notifies all creditors of the death. During probate, the executor identifies and prioritizes debt to be paid. This can include the sale of some items to cover those expenses. Any excess goes to heirs, any deficiency is left unpaid and is written off by the creditor.
Depending on the type of debt, if there are insufficient funds in the estate, the creditor may pursue the surviving spouse. Maryland is not a community property state, so the surviving spouse is not automatically responsible for the debt. However, there are some debts the spouse may be liable for. Below is a list of the most common type of debt and how they affect the survivor.
Under federal law, a surviving spouse has the right to keep the home and continue with the established mortgage agreement, provided they have the resources to do so. There are a few assumptions in that statement, primarily that the property was purchased during the marriage and is held by a Tenancy in Entirety. Additionally, it is specific to married couples, regardless of gender, but does not apply to cohabitation partnerships.
Unlike other types of debt, heirs may also inherit by taking over the mortgage. If the home is to be refinanced to cover estate debt, credit and income levels will come into play.
Home Equity Loan or Reverse Mortgage
This is NOT a home loan and does not have the same exemption under federal law. In the advent of a home equity loan or reverse mortgage, a lien is placed against the home itself. This debt must be paid in full, otherwise the lienholder may end up foreclosing on the property. The debt may be paid by the spouse, heirs or estate during probate.
Credit Card Debt
Credit card debt is determined on how the credit was initially issued. If the credit was obtained solely in the name of the deceased, only their estate is responsible, not the surviving spouse or other heirs. If the credit was obtained jointly, all applicants are responsible for the debt, in its entirety. There is a third situation where one party was the applicant and signed a second party as an “authorized user”. In this scenario, the authorized user is not responsible for the debt.
Automobile loans are secured by the vehicle itself, meaning failure to pay results in loss of the vehicle. Like credit card debt, whether a survivor is responsible or not depends on how the initial loan was obtained. If the loan was solely in the deceased name, the survivor(s) are not legally responsible. If it was a joint loan or co-signed loan, they are. However, should the survivor choose to keep the vehicle, they must continue with the payments.
With the price of education continually increasing, this is an area of substantial concern in the future. As of this writing, student loans are not the responsibility of a surviving spouse or family member. They are the responsibility of the decedent’s estate.
This is a HUGE expenditure and needs to be carefully addressed. Like credit card and other unsecured debit, it depends on how it was arranged. If the surviving spouse did NOT sign onto the agreement with the doctor, hospital or other agent, they are NOT responsible for the debt.
Estate Planning Lawyer in Prince George’s County, Maryland
As with all things legal, there are exceptions and exemptions to just about every rule. The best advice is to speak with an experienced attorney who can help ensure your affairs are in order. To speak with one of our experienced estate planning attorneys, give our office a call: 301-982-0888 or click here.