Pop quiz: What happens to your debt after you die?
A) If you have a co-signer on your mortgage or credit cards, debt collectors will come after him/her for finance payments.
B) Your estate will pay off the remainder of your debt.
C) Certain debt is passed on in your will.
D) Creditors have to eat remaining debt.
Short answer is the estate. However, depending on your situation, all of the above may be true, whether you're dealing with medical debt, mortgage payments or credit card debt. That's because there are a lot of different scenarios that can play out depending on what arrangements a certain person has made - or didn't make - when they were still alive.
Hypothetically speaking, say your spouse of 50 years passed away suddenly. You co-signed with your significant other on a home loan, which is paid off, and on a credit card, which has a $3,000 balance on it. Because you co-signed on the credit card, you're responsible for paying it off. Failure to do so will be reflected in your credit history and credit report. However if you have not cosigned on the loan you are not responsible for the debt.
But say, for instance, that your 85-year-old mother passed away, leaving behind medical debt. Her estate would be responsible for settling this debt and then everything left over would go to her heirs. So, for example, the valuables your mother accrued over her lifetime - car, home, etc. - would be used to settle any outstanding debt. If there isn't enough money to pay debt off, then her estate is declared "insolvent" and her creditors would have to eat the outstanding debt. So here's a credit tip - if an estate is declared "insolvent," heirs don't have to worry about how any outstanding debt will impact them, meaning that no lengthy credit repair measures need to be enacted on anyone's behalf - even if aggressive debt collectors still come knocking. The collectors have about 2 to 6 months to colllect from the estate.
In some cases, however, someone may pass along a home with a balance on it to a loved one in their will. If that's the case, this loved one is the new owner and can either decide to enact a debt management strategy to finance the remainder of the home or they could sell it and pay the remaining balance off with what it is purchased for.
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