You probably don’t want to burden your kids or family with your debt when you die. Here, we’ll cover the ins and outs of debt and death, including an overview of what happens to your debt when you die and how to handle an estate with debt.
We’ll also cover when heirs do not inherit debt (with some exceptions), and why debt collectors keep calling heirs. Lastly, I’ll explain how your heirs can turn the table and actually increase their inheritance.
When Heirs do NOT Inherit Debt
Generally, debt dies with borrower, and the estate will pay, if it can. When someone dies, their assets and debts all get thrown into an entity called the “Estate.”
If the Estate is positive, then the heirs will inherit the assets. For example: Your aunt died with a $100,000 house having a $30,000 mortgage, no cash, and another $30,000 in credit card debt. The executor will need to sell the house and pay off the bills, but now the heirs will inherit the $40,000 remainder.
If the Estate is negative, then the heirs get nothing. However, the heirs DO NOT owe the difference. The creditors have to eat the loss, and usually cannot come after the heirs. For example, your Grandpa rented his home and pretty much spent what he had. He then died with $5,000 in his checking account, but also with $25,000 in credit card debt and medical bills. Now, Grandpa’s estate is $20,000 negative. Do his heirs have to reach into their pockets and settle the $20,000 difference? No. Credit card companies and hospital must eat that $20,000 loss.
There are some exceptions, however:
- Co-signers and co-borrowers on mortgage will be held responsible because they were equally responsible when they took out the loan.
- Another example is when parents guaranteeing private student loans (you can avoid this with federal loans which don’t require co-signers).
- Some hospitals will nudge a spouse or family to co-sign medical bills (check with your attorney before signing). This happens when your loved one is in the hospital and you want to make sure he gets the best possible care. You’re not thinking about the dollar amounts in that emotional state when the hospital administrator puts a pile of papers in front of you to sign in order to continue his care. Your first thought probably isn’t to call your lawyer, but you may be co-signing something that you don’t really have to sign.
- Joint credit cards (between husband and wife or business partners) are another exception. Some people make themselves joint signers for convenience (allowance cards for adult kids, or retired parents). Both parties might be liable for that line of credit, which might not be your intention. FYI: This doesn’t apply to authorized users, such as employees. So, you may want to make your child an authorized user rather than a co-signer.
- Some states (California and Texas) have community property, meaning that spouses share everything even if the asset not co-signed or joint.
Given these pretty clear rules, you may be wondering why debt collectors keep calling heirs? Debt collectors can be pretty aggressive and cold in calling the surviving family. They do it because often, it works! They can guilt or trick heirs into paying debts that the heirs never had a legal obligation to pay. It’s horrible that debt collectors take advantage of grieving, disoriented families. It’s gotten so bad that the Federal Trade Commission has made rules that debt collectors can’t mislead family members into thinking they have to pay. As with all rules, there will always be loopholes.
So, how do you turn the tables on these debt collector bad guys?
Don’t just avoid getting scammed. If you negotiate HARD enough with estate creditors, you can significantly reduce the amount you pay on the bills. As a professional executor, I’ve settled debts for as low as 33 cents on the dollar. By negotiating hard, there were tens of thousands more left for the heirs. I increased their inheritance by knowing the law and flipping the script and getting aggressive with the creditors.
Knowledge is key! Most people don’t have the information they need for successful estate administration. If you want to learn more about probate, check out my book “How Probate Works” on Amazon