At one point in everyone’s life, they will procure some type of debt. Debt is a deferred payment - sometimes in a series of installments - from one party to another. Your debt may be a small amount from your credit card purchases or a larger amount from your mortgage or student loan. No matter what type of debt it is, it is important that you know the nature of your debt and the laws surrounding them to prepare yourself for what will happen to it when you pass away.
Types of Debts:
There are mainly 2 types of debts – secured and unsecured. A secured debt is where a lender must secure the loan in order to protect their investment by having the borrower in the form of collateral. Collateral is anything of sufficient value owned by the borrower.
Some examples of Secured loans are:
● Mortgage
● Auto
● Home equity line of credit
● Auto loans
● Boat and recreational vehicle loans
● Loan for land
● Business loan
Unsecured debt differs from secured debt as instead of collateral being required, the lender creates a high-interest rate. The loan is also usually in between the range of $500 to $50,000,
with shorter repayment periods.
Some examples of unsecured loans
● Credit Card
● Payday loans
● Signature loans
● Student Loans
● Medical debt - this type of debt is taken on by a patient in a contractual sense. A physical contract takes the form of the medical forms and is agreed upon by a patient when they sign it allowing for treatment and promises that they will pay whatever their insurance cannot. However, a contract can also be implied without a signature, as an emergency can occur in which the patient is or is about to be incapacitated.
○ In some states, interest can be charged to unpaid medical bills.
Some medical facilities will hire a debt collection lawyer to file a lawsuit over unpaid medical bills.
Passing Away with Debt:
When you pass, the estate executor obtains a record of your debts and then sends death certificates of your death to notify the Social Security Administration and your lenders. After death, your assets (such as stocks, bonds, vehicles, and real estate) become your estate, which collectors are legally allowed to take. In most cases, it is NOT your heirs’ responsibility to pay for your debt. Be aware that there are debt collectors that will take advantage of grieving families. It is actually against the law for debt collectors to contact the deceased debtors’ children to try to collect the debt. Creditors don’t usually get to take your heir’s inherited assets if you list your children as beneficiaries to a retirement account or life insurance policy. If your debt exceeds the value of your estate, most of the time your debt is gone.
However, if your heir is a co-signer to your credit cards or medical debt (in New York, at least), then they are liable for your debt after death. Co-signers are not a requirement, but if the original borrower does not qualify for a loan by themselves they are used to help pay off the debt. It should be noted that credit card companies are low priority creditors so they will typically be more open to negotiating a lower payment.
If someone with federal student loans passes away, then the government discharges the loan and neither the spouse nor family has to pay for the loans. However, if student loans were received from a private investor, that depends on the policies of that private investor. In one of the nine community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, & Alaska being an opt-in), the lender will try to collect from the estate, then co-signer if there is one, and then the burden would fall on the spouse.
Debts can be overwhelming and you should try to ensure that the burden doesn’t fall onto your heirs. Take the time to make sure they won’t be liable, unless they co-signed, and that their inheritance will stay intact. If you believe you need help, we recommend you contact a licensed estate attorney.
The Law Office of Inna Fershteyn has been dedicated to helping clients for over 23 years. If you need to speak with an experienced estate planning attorney, contact us at (718) 333-2394.