How Your Family May Inherit Your Debt When You Die

Many baby boomers will leave a very different kind of legacy: debt.

Who will inherit your debt if you died tomorrow?

quicklist:title: Credit Card Debttext: Your spouse may inherit your credit card debt if he or she was a joint account holder, or if you live in a community property state where debt incurred after the marriage is considered community property. Your children or other relatives, however, will generally not be personally responsible for that debt unless they co-signed the loan. But keep in mind that credit card debt may have to be paid out of any assets in your estate, if you leave one. (More on that in a moment.)

Still, if heirs or family members want to keep the home, they will have to be able to afford to do so. And that means they either have to continue making the mortgage payments or refinance the loan into something more affordable. A loan modification is also a possibility, but can be difficult to obtain.

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quicklist:title: Auto Loanstext: If you don’t own your vehicle free and clear, your auto loan debt could create problems for your loved ones. Again, if there is a co-signer on the vehicle loan, that person will automatically be responsible for the balance. And spouses in community property states may be responsible for the debt as well.

But what if there is no co-signer or spouse who is liable for the debt? Heirs may have a couple of options. One would be for a family member, such as a child, for example, to purchase the vehicle and pay off the debt. Another would be to contact the lender to find out whether it is possible to assume the payments. And the other option would be to return the vehicle to the lender. The lender will then sell it, but if the price they get is less than what is owed, the lender may try to collect the balance from the estate (if there is one).

quicklist:title: Protect Those You Lovetext: If you have debts that would be a burden to your loved ones upon your death, try to get adequate life insurance so those debts can be paid off. Most financial experts recommend a term policy rather than credit insurance that only pays off a specific loan; however, if you are uninsurable due to a medical condition, your choices may be limited.Also double check your insurance beneficiaries periodically to make sure insurance proceeds will go to the person actually responsible for the debt. If, for example, you were married to someone else when you first obtained your life insurance policy and you named them as the beneficiary but never updated it, they will get the proceeds — even if your new spouse is now stuck with debt you’ve incurred recently.

Of course, if you can get out of debt, that’s the best way to ensure your heirs won’t be stuck with your debt when you die.

quicklist:title: Cleaning Up a Debt Messtext: If a spouse, parent, grandparent or other relative has died recently, the person who is handling the estate (usually called the “executor” or “personal representative”) can order a copy of the deceased’s credit reports to find out which debts are still outstanding. Getting a credit report for someone who is deceased is also important because their information is sometimes stolen to commit identity theft.

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While you are at it, it’s not a bad idea to get your own free credit report from all three credit bureaus to see which debts are reported. You can also get your credit score for free, but there really isn’t a point in getting a credit score for the person who is died.

Be very careful about taking money or property that belonged to the person who died if there are debts outstanding. Even if you aren’t personally responsible for those debts, creditors may have a claim on the property of the estate, and may look to you for payment if you took assets out of the estate without following the proper procedures. It’s best to get advice from an estate planning or probate attorney first.

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