Most of us try our best to pay off all of our debt before we die. Of course, what we really want is to earn more money than we make and have a large savings account when we die, but this does not seem to happen for a lot of us. Debt seems to be a fairly widespread problem in the US. In fact, the average US household is approximately $130,000 in debt, and one in five people in the US firmly believe that they will die long before they are able to pay off this massive debt. This leaves us with the question of what will happen to our debt if we die before we can pay it off? Should your family be worried about being held responsible for all those bills you were unable to pay off? Unfortunately, the answer to these questions are not that simple.
Probate
The process of probate is a way that our country ensures that the families of a recently deceased loved one are not stuck paying off the debt of the deceased. Probate can be a long and stressful process for many, and, unfortunately, this process will not release any property or assets that the deceased left behind for their loved ones until the entire process is finished.
When a loved one passes, their will and assets will become the responsibility of an executor. Their main purpose is to put everything in order. They will be tasked with detailing everything included in the estate of the deceased and paying off as many debts as possible. Then they will be able to distribute whatever assets are left to the appropriate beneficiaries dictated through their will. As you may have guessed, this process can take a long time. Some beneficiaries may not know what they will inherit until months down the road. Remember all of their debts may be paid off, but anything in the estate may be taken into account and levied for the payment of their bills. This means any heirlooms, saving accounts, or other memorable objects could possibly be used to pay off their debts, and you may not get what you thought you had coming your way.
Debts covered in Probate
There is an order to debts covered in probate. The top layer of debts is funeral costs, taxes, and secured debts, such as mortgages. These debts take top priority and are typically paid off first with any money from the estate. If there is not enough money to cover these costs, the executor will sell off other assets in the estate to make up the difference. Typically, if a beneficiary inherits an item, such as a car or house, the bank will allow them to keep it as long as they keep up the payments. Next on the probate dent totem pole is unsecured debts, such as credit cards or student loans. If there is enough money left in the estate, then the executor is obligated to pay them off. However, if there happens to be no money left, then the lenders will be out of luck.
Probate debt exceptions
Remember there are always exceptions to every rule. Here are some exceptions to probate debt:
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Joint debts are not covered in probate. According to the law, the debt will now become solely the responsibility of the surviving co-owner. If you owned a house with your spouse, your house will not become part of the estate because one of the owners is still living. You will not inherit any debt that is solely in the name of the deceased, but you will become responsible for any debts that the two of you co-signed on.
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Retirement accounts. If the deceased left an individual retirement plan or a 401k account to someone, then they will automatically receive them. These will not go towards the estate. There is the low chance that the government may go after these accounts to pay off any unpaid taxes the deceased may owe, but for the most part, these will go directly to the beneficiary named.
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Life insurance. Life insurance is treated the same as retirement accounts. These policies will go directly to the beneficiary named and will not become a part of the estate.
Probate debt exception to the exception
The exception to the exception clause only falls into effect when you live in one of the ten states that recognize community property. Community property is a debt that was undertaken to help or benefit the family, such as the deceased buying a house for the entire family to live in. If the state finds the family benefitted from this debt, then the family will be held responsible for paying off the mortgage. The rules will be a little different if you happen to reside in these ten states:
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Alaska
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Arizona
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California
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Idaho
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Louisiana
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Nevada
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New Mexico
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Texas
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Washington
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Wisconsin
Many of us will find ourselves trying endlessly to pay off our mountain of debt. Remember even if it is not possible for us to die debt free, our loved ones may not have to fear trying to pay off our mountain of debt. If your estate is not enough to pay off your bills, then your loved ones cannot be forced to pay them. Your loved ones may lose out on an inheritance, but at least your creditors legally have no right to force your loved ones to pay your unpaid debts. Of course, many of them may not give up very easily. You may find that some will endlessly call over and over trying to get some sort of payment. However, you are not legally required to pay them anything. If you do happen to encounter any creditor that is being too aggressive or pushy in repaying them, you can lodge a complaint with the Consumer Financial Protection Bureau. Remember, it will be much easier for your family if you are able to pay off your debts before passing, but if you are unable too, you can rest a little easier knowing your family will not be required to pay off your debt once you pass.