The death of a loved one can bring both trauma and hardship, especially when it’s unexpected. You have barely begun the grieving process as medical bills and statements begin to fill your mailbox. Some callers are compassionate and understanding, while others press for payments as concern over unpaid bills lingers.
In many cases you are not only dealing with the death, but settling the estate. This adds a complex element around what to do with remaining bills and debt. It can be overwhelming. You want to know what the legal responsibility of the estate is, along with creditors ability to collect for others.
Types of Accounts and Legal Obligations to Account Holders
Accounts come in three basic forms. They are either single accounts, joint accounts, or authorized user accounts.
Single accounts are typically in one person’s name, and that person is solely liable for paying back any debts incurred on the account. It doesn’t matter how close of a relative you are, typically you have no liability for single accounts. The creditor, however, may have a legal claim against the estate. Community property states view debt and liability differently and spouses could be held liable for debt, even if the account is not in your name.
Joint accounts are titled in the names of two or more people, and generally have joint liability. Couples often owned joint property, joint accounts, and carry debt in both names. Any debt held by both parties gives creditors the right to collect 100% of any outstanding debts from either individual. This means if you have an account with a $10,000 debt balance, the surviving spouse would be held responsible for the entire outstanding balance. Joint debt can be in the form of a joint, cosigned, or a guarantor account. With regard to liability, there is little distinction between these titles.
Authorized users offer account access by one party where the legal liability for repayment is held by another. These accounts are frequently seen in credit card companies who encourage account owners to give additional people spending authority on the account. Authorized users are not legally liable for any account balance or repayment of debt.
Secured and Unsecured Debt
Secured debt is an asset-based account which uses something of value as collateral. Homes and cars are common forms of debt security. If payments are not made, the creditor can take legal steps to acquire the asset and settle the debt. The reduced risk of non-payment often accompanies lower interest rates on the debt. The estate process allows secured debts to be returned to the lender to reduce or eliminate liability for the debt. If the asset is on a joint debt account, returning the asset could result in credit consequences for the surviving account owner.
Unsecured debt is the riskiest because creditors have limited avenues for repayment. In an estate settlement unsecured debt is the lowest priority, leaving many creditors without repayment.
During the estate settlement process debts are separated based on whether they are secured or unsecured. All debts within the specific category are paid in full before the next category is addressed. This results in secured debts being paid completely before any unsecured debt is recognized.
At the death of a loved one, assets are either counted in the estate or paid directly to heirs. Accounts that offer beneficiary designations, such as life insurance or retirement accounts, may bypass the estate and go directly to surviving heirs, if beneficiaries are listed. Taking this route could potentially bypass creditors who will collect from the estate.
The estate is probated based on the will, if one exists, or through the intestate process, based on the laws in the state. All debts will typically be settled before any payments are made to surviving heirs.
Remaining Medical Bills
Medical bills are usually in the name of the treated individual and is collected as unsecured debt from the estate. Unless you sign forms accepting liability, medical bills will not be the responsibility of surviving family members.
Student Loan Liability
Federally guaranteed student loans include a clause discharging outstanding loan balances at the death of the borrower. If the debt is discharged, it may be excluded from the estate settlement. Parent loans and private loans may not offer this benefit.
Estate Settlement Process
Begin with a comprehensive list of assets and liabilities. Accounts with beneficiaries often have fast disbursements after review of the death certificate. Other liabilities will be collected during the estate settlement process, which is managed by the executor.
Solvent estate, those with enough funds to cover all liabilities, will pay all debts and then distribute remaining assets to heirs based on the will, if one is in place. Insolvent estates that do not have enough assets to cover the creditor payments, heirs will not receive any payments from the estate settlement. In this case, debt payments will be determined based on priority.
The order of priority is typically all secured debts are paid first. Funeral expenses are behind that and unsecured debt is paid last.
Remaining debts after estate settlement may become the responsibility of the surviving spouse if you live in a community property state.
First Steps When a Loved One Dies
Bill collectors sometimes make efforts to collect debt in which you may not be legally liable. However, ignoring these calls or letters could result in unnecessary payments on accounts or damage to your credit.
Obtain a credit report for the person who has passed away. This step will provide a list of open accounts.
Contact companies from the credit file and determine if life insurance was on the account. Credit protection or life insurance may be on the account which could pay the balance with proof of death. These policies do not typically create a windfall for heirs, but often are enough to cover existing balances.
Check titles on all accounts. This will help you decipher the liability for each account and who is responsible for remaining debt. A death certificate is generally required to close an account and ensure no additional charges are made. Creditors may also require proof of executorship before discussing the account with you.
Address secured debt. Whether held individually or jointly, creditors may offer options if you wish to keep the asset. You must decide if you want to keep or return the asset to the lender. Jointly held debt may require refinancing.
Maintain records. Take notes on conversations and actions you take regarding both assets and liabilities. Keep receipts and other documents in a file in the event a debt shows up later and you need to either prove payment or lack of liability.
Mourning the loss of a loved one is a very difficult and stressful experience. Dealing with debt and credit issues also tops the list of stressful events. Understanding what you are legally responsible for will help you make good decisions during this stressful time.
To receive a FREE debt analysis, contact one of the specialists at Timberline Financial today. They can help answer your questions and provide you with a customized plan to reduce your debt.
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