WHAT HAPPENS TO DEBTS AFTER A LOVED ONE DIES?
Debts After Passing Away
When a loved one dies, either the personal representative or an heir is likely going to have to figure out the finances, including any financial obligations. All of their assets (i.e., bank accounts, businesses, cars, real estate, etc.) are all lumped together into what is called an estate. If the estate is over $50,000, it will go through a court proceeding called probate. Certain assets may not be included in the estate-life insurance proceeds and retirement accounts.
Through the probate process, the value of the estate will be determined in greater detail and debts will need to be dealt with before anything is given to heirs.
- Secured debts
Certain debts, like mortgages and car loans, do not vanish. They are secured by something of value (i.e., the house or the car). If that mortgage is not paid, the lender can foreclose on the home and sell it to repay the debt. If car loans are not paid, the car can be repossessed and also sold to repay the debt. These types of creditors are first in line to get part of the estate which secures that debt.
- Unsecured debt
Credit card companies and other creditors like them are the next people in line. These non-secure debts are not necessarily entirely wiped out. These companies can file a claim against the estate. The person who is handling the estate will be required to send notice to creditors so that they can file a claim. If they do not file a claim, they get nothing; however, if they do, the Court will usually use that money to pay the debt.
- Student loans.
If a student loan is a federal loan, that will be wiped out. However, that is not true of most private student loans. Also, if there is a co-signer, that co-signer could end up being on the hook for that loan and the debt of a borrower may trigger a default, which means that the co-signer would have to pay off the loan immediately. If there isn’t a co-signer, the student loan company can file a claim against the estate.
Anything that is left over would likely go to the estate and eventually the heirs.
As Wisconsin is a community property state, your spouse may be responsible for any debts you incurred during the marriage. This is particularly true if it is a joint debt or you co-signed on any of the loans. Planning ahead is very important so that a burden isn’t left for someone else.
Please contact Petit & Dommershausen’s estate planning department so that we can help make sure that your assets pass to your heirs as smoothly as possible.