Paying Debt

Americans are known for being heavily in debt, whether with medical or credit card debts. According to American Debt Advisor, "So how many Americans are in debt? Excluding minors, the total is somewhere in the neighborhood of 80% if we include secured debts like homes and cars." The recent economic recession has also caused millions of Americans to face insurmountable debt. While the passing on of one's loved one is always difficult, this stressful time can be compounded by various money and property issues.

Are you in poor health and laden with debt? Or perhaps you are an estate administrator or family member whose loved one passed away but left a significant amount of debt behind. What happens in this situation?

A solvent estate is when an individual left enough assets to pay off his/her bills. When an estate is solvent, the personal representative is entrusted with paying off all the decedent's bills from the assets owned by the estate. An insolvent estate on the other hand is when there are not enough assets to pay off a decedent's bills. When there are not enough assets to pay off a decedent's bills, a personal representative will need to prioritize the payment of the bills according to federal and state law. These laws dictate which creditors must be paid in full, which can receive partial payment and which will not need to be paid off. Companies not paid in full will have to write off the bad debt.

When a decedent's estate is insolvent, his/her beneficiaries named in his/her estate plan will get nothing. However, the beneficiaries will not be responsible for paying off the decedent's debts (unless the heir was a co-signor or co-guarantor of a debt).Other exceptions to keep in mind is if you are a widow/widower in a community property state (such as Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) or if you are the executor of a will (but in this instance, you will not have to pay out of pocket). The Federal Trade Commission, the national consumer protection agency, has stated that usually a surviving relative is under no legal obligation to repay the debts of his/her family member.

After a family member dies, a creditor is notified. They will file a claim for the repayment of any outstanding debt. This is the order by which debts are paid off:

  • Funeral expenses, state and federal taxes, administrative fees
  • Loans and mortgages
  • Creditor cards

What should you be doing now?

If you are getting older and thinking through estate planning or if your parent, grandparent, sibling or other relative is aging, it is important that these issues are understood and addressed. A good estate plan can go a long way towards protecting one's assets and family. There are wonderful opportunities that can assist an individual in passing on their money to loved ones. If you put your assets into an irrevocable trust, that trust cannot be modified or terminated without the permission of a beneficiary. Transferring assets into a trust protects them from being collected by creditors. When this occurs, the grantor removes all of his/her rights of ownership to the assets and the trust. Another option is gifting, which guarantees money ends up in the hands of your heirs and not creditors. Make sure you understand the gifting and taxes laws before going down this route, however.

Before making an estate plan, it is important that you speak with a legal professional to find out about which options are best for you, your family and the future of your loved ones. Individual circumstances vary so no estate plan should be cookie cutter! For more good reads check out the following: