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Credit & Debt Woes of the Dearly Departed

Debt After DeathYou have enough trouble handling your own credit and debt problems. Now a beloved relative or spouse has passed away leaving behind a large amount of unpaid debt. Beyond dealing with the obvious grief and sadness, there are important financial issues that need to be addressed right away. The most common concern is whether or not you’re responsible for the unpaid debt that they left behind. Although most contracts terminate when one party dies, it’s a little different with credit cards and unpaid debt balances. Do you know what your obligation is as the nearest relative?  Here’s the scoop on dealing with their debt:

Did They Leave a Will?
A will helps to put some order into the financial affairs of a decedent’s assets. Before any assets can be distributed to the heirs, all debt must be paid and assets will be sold by the executor to cover the debt. Without a will, the court appoints an administrator to distribute the assets after debts are paid.

Any outstanding debt left after someone passes away is determined to be the responsibility of a survivor based on the state in which they lived. States are governed by community property or common law, but generally this kind of debt is not inherited. The debt of the decedent is settled first by creating a probate estate of all their assets. A solvent estate will have enough assets to cover all the bills. Any remaining assets will now be distributed according to the will or if they have been titled appropriately to avoid probate.

But if the estate is insolvent, one that doesn’t have enough assets to pay for all the debt, only some of the debt may be discharged. Payments will be prioritized as provided by federal and state laws and companies that weren’t paid in full will simply write off the debt. Heirs will inherit nothing in a case like this.

Common Law States
If the debt was solely in the name of the decedent, no one will be liable for any of the debt and it will be written off by the lender or credit card company. Some states have a family expense doctrine that suggests the surviving spouse pay certain debts like medical debt.

* Common law states include: Alabama, Colorado, District of Columbia, Iowa, Kansa, New Hampshire, Montana, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Texas, Utah

Community Property States
Generally speaking, in community property states, debt incurred by a spouse for the benefit of the family is considered a “community” debt, and therefore the spouse is responsible for repaying that debt. All assets and earned income acquired during a marriage is divided in half, with each partner owning fifty-percent. Thus, the debt acquired is considered the same way – half and half. If the assets do not cover the debt, the surviving spouse will be liable for their community debt. However, each state writes its own legislation, making it imperative that you consult with an attorney in your state to understand your rights and liabilities.

* Community property states include: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin

Debt of Parents
Children are not obligated to cover the debt of their parents, unless they’re a party to the contract. In that case, they are not inheriting debt; it’s their debt in the first place. Creditors who try to collect such debts may be subject to claims under the Federal Fair Debt Collection Practices Act and state consumer protection laws.

One last consideration is to check with the credit card company for any insurance coverage that may be applied to the account. You may find that the debt will be taken care of by an insurance policy.

* Outstanding family debt? Consider debt settlement

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