Even though most of us don’t like to talk about it, many of us worry about what will happen to our loved ones when we die. One of those concerns is the liability for our debts. Will our family members be held responsible for our remaining credit card balances, an unpaid mortgage, or car loans?
The answer, in general, is no. The Federal Trade Commission protects the public from abusive, unfair, or deceptive practices taken by overzealous collection agencies. The federal Fair Debt Collection Practices Act (FDCPA) protects all of us from harassment by bill collectors. A recent law passed in New York takes this a step farther by requiring collection agencies to inform relatives that they are not liable for the unpaid debts of a loved one; collection agencies there can’t even imply that relatives are responsible for remaining bills.
Regardless of what state you live in, it is helpful to understand the process your family will have to go through after your death. When you die, your bills become part of your estate. If you haven’t named an executor in your will (or you have not left a will), the court appoints someone to handle that role. A review is made of all your accounts with outstanding balances as well as your assets. This process is called probate. If it is found that unpaid balances exceed the assets, many of the bills will disappear.
There are, however, exceptions to this rule. A relative may be held liable for a debt if they co-signed on a loan or if you live in a community property state like California. Some types of outstanding bills, like health care expenses, might become an issue if your state holds your spouse responsible. Finally, if your executor did not comply with state probate laws, that person could become liable for debts not paid. Collection agencies can spring into action in these cases.
Life insurance and retirement account payouts are not considered part of your estate, so the beneficiary is not obligated to use that money to pay off any of your debts. In the case of a mortgage, the person inheriting the house also inherits any remaining balance. If that person doesn’t want the house or can’t pay the mortgage, the house is sold and any proceeds are applied to the balance due. The same is true of car loans.
Collectors do have the right to call your spouse and executor and discuss outstanding bills. They may call other relatives to obtain contact information for the designated executor, but not to discuss your debts. And laws like that passed in New York law this year make it clear to collectors that they must not only affirmatively tell relatives they are not liable for your debts; they may not even legally imply otherwise.
By planning ahead, leaving a will, and naming an executor for your estate, you can rest assured that your loved ones won’t be held liable for any debts should you pass away. Even though it isn’t a topic we like to think about, making sure your wishes and your family are protected can make a huge difference. Consult an estate planning attorney to assist you if you need additional help or simply need more information, and never have to worry about your grieving family being bombarded by debt again.
Sources:
https://www.consumer.ftc.gov/articles/0081-debts-and-deceased-relatives
https://www.debt.org/advice/deceased-relatives/
https://www.nolo.com/legal-encyclopedia/i-am-mothers-only-surviving-heir-do-i-pay-debts.html
https://www.valuepenguin.com/life-insurance/what-happens-to-debt-when-you-die
