When you or someone close to you is facing a terminal illness such as a late-stage cancer, the knowledge of where outstanding debts such as medical bills and credit card debt go after passing is something all family members should be aware of and prepared for. It would be nice for the debt to just disappear, but unfortunately it doesn’t. Educating yourself and your loved ones is the best way to prepare for and address a situation in which debt is inherited by family after death.
So, what happens to debt after death? It’s important to know so any debts left behind don’t eat up your estate that’s left for your next of kin. This article outlines how the most common debts or loans – mortgage payments, credit card debt, and medical bills – are handled after death.
If the mortgage isn’t paid off in full after death, someone will still be responsible for continuing those payments even if the deceased was the mortgage owner. If there is a joint homeowner, mortgage responsibility will be entrusted to them and payments will continue as scheduled. However, if this isn’t the case, the heirs of the estate are expected to assume the remaining mortgage payments, which usually takes the form of a new mortgage in their name, the selling of the house, or cash if possible. Here responsibility and inheritance go hand-in-hand and if the payments are not continued after death, the mortgage lender can foreclose on your home.
In order to ensure that the plans you make for your estate and outstanding mortgage payments after death are carried out, it must be stated in your will how and to who the assets will be passed down. If the homeowner dies intestate (without a will), then the estate will be subject to your state’s laws of succession, which can cause more frustration and procedure for your heirs.
Outstanding credit card debt after death is extremely common. If a joint account holder (who cosigned the account) exists on the account, they will be held responsible for paying off the balance or continuing to make payments. If there is no joint account holder, then the debt will be paid out of the estate and whatever remains of the deceased’s assets. If the estate is unable to cover the debt (meaning there was more debt left behind than assets accrued), creditors usually can’t come after the remaining balance.
However, there are some ways your next of kin can be stuck with paying off the entire balance. Besides being a joint account holder, if an authorized user continues to use the card after the primary cardholder’s death, it could have criminal implications. Make sure if there is joint liability or others who have access to the account know what the consequences are for making that mistake. In addition, if a divorce settlement includes joint credit account liability and the one party passes away, the other party will be liable for the entire balance.
When a person has medical debt from a terminal illness and passes, it also doesn’t disappear the way many believe it does and may burden those left behind to pay. Postmortem medical debt doesn’t always get paid back in full and the result is dependent upon whether the estate is either solvent or insolvent. A solvent estate is one that holds enough money to fully cover the amount owed in medical bills, in which case the bills will typically be paid in full and then whatever is leftover goes to the heirs. If the medical bills were due to a chronic and late-stage illness, this usually isn’t the case as medical bills continue to rise. When an account is insolvent, some creditors might be paid in full while others only receive partial payment. An estate planning attorney can be very helpful in this type of scenario and can help avoid costly estate planning mistakes.
Debt may stick around after a person passes away, but that doesn’t mean it should ruin the lives of those you leave behind. If you or a loved one has a terminal or late-stage illness, make arrangements to avoid any surprise debt liabilities. If medical debt due to a terminal illness is impeding on you and your family’s quality of life, our Funds For Living financial assistance program may be able to advance you funds based on the face value of your life insurance policy. There are no fees and no obligation to apply for qualification.
Disclaimer: Fifth Season Financial is not a financial advisor or consultant and recommends that you speak to an advisor or expert before making any significant financial decisions.
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