Will Your Spouse Inherit Debt?
The spouse of a deceased individual needs to know if they will inherit debt. If the couple is a resident of a community property state, the answer becomes more complicated. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is a bit odd as it is the only opt-in community property state. In this state both parties must agree to make their property community property.
The answer is: maybe, maybe not. The correct answer depends on many factors.
Is it a federal student loan or a private student loan?
Did another person co-sign the loan?
Does the loan offer death forgiveness?
Do you live in a community property state?
Federally backed student loans are automatically canceled with the death of the borrower. However, many private student loans are not so generous. If the loan itself offers death forgiveness policies, then that debt is also forgiven with the death of the borrower.
If there is no death forgiveness, the lender will collect the amount remaining on the loan from the estate of the borrower. Assuming that there is not enough money in the estate to cover the loan, the lender will attempt to collect from the spouse if there is no co-signer. In many cases, the lender may have to write off any remaining balance on the loan.
The outcome of this collection attempt depends upon the laws of the state in which the family resides. If you do not live in a community property state, then the lender cannot collect from the spouse. However, if you do live in a community property state, the answer is again maybe or maybe not. Community property states have different laws relating to student debt. You will have to check with the laws of the state.
Credit Card Debt
The estate of the signer of the credit card is liable for the debt. If there is not enough money in the estate to pay the credit card debt and there was no joint signer on the credit card, the credit card company is out of luck. However, be aware that you should not use the card unless you are a co-signer. There are legal implications when someone other than a signer uses a credit card.
Of course, if the credit card belonged to another individual as well as the deceased, the credit card company will approach that person for payment. Another scenario is if the signer is divorced and the spouse of the owner has agreed to pay the card. The death of the owner will not dissolve that liability.
Again the outcome may be different if you live in a community property state. In those states, the liability of one spouse is the liability of both spouses. The laws of the state will dictate the answer to this question.
The death of a borrower of a mortgage does not relieve the debt. After all, the house is collateral for the loan. The surviving spouse can continue to make the payments on the mortgage and then nothing happens. You may not inherit debt but it has to be paid.
If there is no surviving spouse, the mortgage company can sell the house to pay off the loan. If there is not enough equity in the house, they will come after the estate of the borrower. If the house is sold for more than the payments left on the loan, the remaining balance will be paid to the estate. Those monies will be distributed per the declarations of the will or by the court if there is no will. So one way or another you do pay for it.
Loans on Cars
Sometimes the family can continue to pay the loan on the car and keep the car. However, the loan company needs to be advised of this. You may have a problem with the insurance on the car as it will be in the name of the deceased.
If the family does not want the car, it should be given back to the loan company. They, in turn, will sell the automobile. If they obtain more money for the car than the loan, the proceeds will be turned over to the estate of the deceased. If there is money still owing for the car, the loan company will obtain that money from the estate.
If the estate does not have enough assets to pay the remaining balance, and there was no co-signer, the creditor is simply out of luck. In most cases the spouse will not inherit debt in this case. The problem comes if you live in a community property state. The state laws again have to be researched to find the answer.
The same scenario for credit card debt relates to medical bills. However, many times a spouse is liable for medical bills that are necessary. Thus, even after the death of a spouse, you may inherit debt.
In community property states, the debt does belong to the spouse. The creditor will try to collect from the estate of the deceased but can and often will come after the spouse for payment. It is often best in these cases to consult an attorney to find out about the liability.
So the final answer is still maybe or maybe not for all types of debt that belong to a deceased individual. The state’s laws in which you are a resident will often have the final say. It is best to assume that you will have to pay for the debt one way or another. After all, if the estate pays the debt, there will be less money for the survivor so actually, the money will come out of the survivor’s money.
Keep this in mind before it occurs, not after!