Aug 27, 2013

Does Debt Die With the Debtor?

Debt does not die with the debtor, but instead is placed on life support and faces the possibility of having the plug pulled at any time.

When one dies, one’s property and debts become an estate probate issue.  Each state has it's own set of probate rules to assure that the deceased’s debts are paid, and that their property is distributed according to their wishes.  Probate laws vary from state to state and can become complicated.  However, a few common-sense considerations make the whole process understandable.

Determining if debt dies with the debtor can be greatly simplified by asking the three questions below.  Regardless of what state you live in and how your property and debts are held, these questions must be answered.

For the sake of simplicity, let’s assume the deceased was married, is male, and had one wife in his lifetime who survived him.  In forty-one states, the house, along with all household goods and jointly titled property would go to the surviving spouse.  Answering the three questions below will clarify whether the credit card debt gets paid.

Who Owns The Debt?

When debt is jointly held, all parties to the debt are equally responsible for payment of the debt.  Married individuals who have jointly held credit cards are responsible for the debt if the spouse defaults or dies.  Joint responsibility also applies to co-signed loans; if one party dies or defaults the other must pay.   In this instance, the debt lives.

Credit card debt that was owed exclusively by the deceased will fall to the estate for payment, and the debt continues on life support.

Who Owns The Property?

The deceased’s property can be sold to pay credit card debt, so it is important to identify property that belongs only to the deceased.  In our example, all the household goods, the house, money in a joint checking account and other jointly held assets automatically become the property of the wife, so they cannot be sold to pay the deceased husband's debts.

So, if the husband had no assets in his name exclusively, there would be nothing to sell, no cash in a bank account, and no money in the estate to pay his debts.  Credit card debts owed exclusively by the deceased would die here, because there is no money with which to pay them.  If the husband had assets in his name only, those assets could be sold to raise money, so the debts would stay on life support.

Who Owns The Proceeds?

Once the deceased’s solely owned property has been turned into cash and solely owned debts have been identified, it is now time to consider who gets paid.   Each state has laws that stipulate which creditors get paid first if all creditors cannot be paid.  Administrative expenses, funeral expenses, family allowances, and taxes are a few of the priority payments.  Credit card debt is at the bottom of the priority list.  If there isn’t enough money to pay all the debts, then the credit cards either don’t get paid or they get a pro-rata share of whatever is left.  When the estate runs out of money, unpaid credit card debt dies.

Debt does not automatically die with the debtor; it will linger on life support until the final settlement of the estate.

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