Thankfully, you can’t take it with you. Your debt, that is. When you depart this world, your debt stays behind.
That may be reassuring to a lot of consumers. According to a new survey of 1,004 U.S. adults from CreditCards.com, 1 in 5 Americans believe his or her debt will never be paid off.
But less reassuring: Your debt could cause headaches for your descendants, depending how you handle things — and how they handle everything.
The general rule of thumb is that if your loved one has a lot of debt, and there’s plenty of money to pay it off, the debt will be paid off, according to Tim Gagnon, a professor of accounting at the D’Amore-McKim School of Business at Northeastern University in Boston.
“If a person dies with massive debt but sufficient assets to cover the debt, then the personal representative must liquidate assets to pay the debts before anyone inherits any assets,” Gagnon says.
But what happens to your debt if there isn’t enough money to pay it off? Is anyone responsible for the credit card debt you couldn’t pay? That car you were driving and still owe money on — will that be taken away?
There are no hard-and-fast rules when it comes to death and debts, but typically, you can expect the following.
Death and credit card debt. If a loved one leaves behind thousands of dollars in debt on credit cards, you probably have nothing to worry about. That is, unless you are a co-signer on that card, in which case you have a financial loss on top of an emotional one.
If you are an authorized user but not a co-signer, exhale — you’re in the clear.
That doesn’t mean, however, that the credit card company won’t try to see if you’ll pay the money anyway. And if a spouse dies, and your name is associated with some of the debt, you can expect the creditor to insist that you pay up.
Matthew Carbray, a financial advisor in Avon, Connecticut, says he once had a client die with almost $125,000 in credit card debt.
“He was the household breadwinner, and he had used revolving consumer credit card debt to finance three college educations for his children. When he died unexpectedly at the age of 61, his wife was confronted with over 21 separate credit card balances,” Carbray says.
The wife had no knowledge of the debt, he adds, and most of it, fortunately, wasn’t in her name. Some was, however. But once Carbray sent a letter to the credit card companies explaining his client’s inability to pay the debt back, it was discharged, and she was off the hook.
Mortgage debt. If the deceased’s house isn’t paid off, the bank will eventually foreclose — with some caveats. If you live in the house as a co-owner, or if you inherited the house, as long as you take over the payments, you should have nothing to worry about, according to Timothy Kingcade, a bankruptcy attorney in Miami.
Even if you don’t assume the payments, federal law can’t force you out right away, Kingcade says, adding that if there is an outstanding home equity loan, you would have to pay it, possibly immediately.
Auto debt. If your parent, child or spouse passed away, and he or she was still making car payments, the vehicle can be repossessed by the ban, but not if you’re willing to take over the payments, according to Jerry Love, who runs a certified public accounting firm in Abilene, Texas.
And if it’s a family member’s car that you aren’t crazy about and have no desire to own? Let the bank take it.
“Generally, the good news is that you can inherit assets … but you cannot inherit debt,” Love says.
But don’t get too cute. Keith Baker, a professor of mortgage banking at North Lake College in Irving, Texas, who also teaches personal finance classes, says he was recently contacted by a friend and former client whose mother had given most of her kids $40,000 in cash advances from her credit cards before she went into a nursing home.
It’s hard to tell what she was thinking when she did that, but she eventually passed away, and the credit card companies are trying to get the money, which has been spent.
“My friend … who has some savings, is the person they are pursuing because the her family members have blown the transferred money and are living paycheck to paycheck,” Baker says.
Love has some cautionary advice as well. He says deathbed gifts can become problematic if the giver owes a lot of money.
“This may vary state by state as to how far back the ‘look back’ period extends, but creditors may have the right to petition the probate court to reverse any gifts made just before the death,” Love says.
“So, for example, if the doctor gives your mother two weeks [to live] … and she makes significant gifts during that time period, which causes her debts to exceed the assets of her estate, the creditors may be successful in getting the court to order the gifts be returned to the estate,” he says.
Another thing to watch, Love says, are the forms you’re filling out if you have, say, a dying parent in the hospital.
“Be careful about what financial agreements you may sign,” he says. “If you have cosigned a note or if you have given a personal financial guarantee to the hospital, then you may have created a financial obligation which is enforceable after the death of your parent.”
That may be perfectly OK with you, of course, but it’s best to know what you’re getting into. And do not use any credit cards belonging to your deceased after he or she passes away, Love says.
Sure, it’s one thing if this is a credit card account belonging to your spouse, and it’s a joint account, and you know exactly what’s in the account. But if it belongs to your parent, sibling or child, and you really don’t know all of their financial details? That could bring trouble, Love says.
Not only would you understandably be liable for those charges, but Love points out that the credit card company may suggest you’re obligated to pay the charges that went on before the death.
Which means that even if you don’t pay your loved one’s debts, you could be haunted by her debt collectors.
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