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Who Pays Your Debts When You Die

MoneyWise

Christian talk radio with Rob West

October 10, 2022

One of the facts of life is that each of us will die someday and everything we have will be left behind, including our debts. So, who will have to pay those debts? Today, we’ll be talking about debt after life and how it can affect your loved ones and beneficiaries. Often on Mondays, we focus on foundational matters related to finances. And you may recall that our teaching model centers around the five basic things you can do with your money. You can earn it, live on it, give it away, owe it to someone, and you can grow it by investing. Earn, live, give, owe, and grow. Today, we’re focusing on owing money and on a particular aspect of that topic that perhaps you haven’t thought about: namely, what happens to your debts when you die? Of course, those debts won’t be of much concern to you at that point, but they could be of great concern to those you leave behind. Many people assume that when they pass away, their debts will be written off by creditors and not collected. Well, that is true with regard to some debts. But it is the exception, not the rule. The U-S government does write off federal school loans when the person who owes the money dies. And that extends to PLUS loans parents take out for their children’s education. In fact, if either a parent or the student dies, the loan is written off. One other possible exception is small medical debts. Sometimes medical providers will write those off, but they are under no obligation to do so. As for other kinds of debt, those obligations do not' go away. They’ll be assigned to other people who will become responsible for paying them, or they’ll be paid from the proceeds of your estate. We’ll explain that in a moment. But first, you need to understand that there are two types of debt: secured debt and unsecured. A secured debt is anything that has collateral that is, something the creditor could take and sell to pay the debt if it came to that. Secured debt includes things such as a home mortgage and a car loan. A creditor could foreclose on a house or repossess a car. Those are secured debts. In contrast, unsecured debt has no collateral. Credit cards fall into that category. Typically, a secured debt will pass to a beneficiary. If your spouse becomes the sole owner of the house when you pass away, and you still have a mortgage on it, he or she will be responsible for continuing the payments. If you bequeath your car to a loved one, and it still has a loan on it, the beneficiary will have to either take over the payments or refuse the vehicle. As for unsecured debts, such as credit cards, those debts will not pass to a loved one unless that person is a joint account holder. If the person is simply an authorized user but not a joint account holder, that person won’t be responsible for the debt. Now, in most cases, credit card debt will be paid from your estate. Estate is a legal term for the assets you leave behind, such as cash in a bank account or maybe a set of tools or collectibles you own. To satisfy the creditors, the executor of your estate will have to pay bills from those assets. That could involve selling things you left behind to generate enough cash to clear the debts. When settling an estate, creditors are first in line legally. They get paid before anyone else. That means fewer resources will be left for your heirs or to give away to your church or a charity. Fortunately, some assets are not considered part of your estate, including life insurance proceeds and retirement accounts with named beneficiaries. Those are protected against creditors. Let me say a word about medical-related debt. In most cases, a survivor is not directly responsible for that unless he or she co-signed a form pledging financial responsibility. However, laws relating to how debts are handled after death vary from state to state. Nine states in the U-S are what are known as community property states, in which marital assets are owned jointly. Medical debt may be handled differently in those states. Now, I have given you only the general lay of the land regarding what happens to debts after a person dies. It may be wise to consult an estate attorney if you have specific concerns about how debts will be dealt with based on the state you live in or your particular financial situation. You don’t want your loved ones to be taken by surprise. On today’s program, Rob also answers listener questions: ● Would an iBond or a traditional IRA make sense after maxing out Roth IRAs? ● What happens when trading on a company’s stock is frozen? ● What resources should you look into for college scholarships? ● How can you roll investments into I-bonds? RESOURCES MENTIONED: ● Scholarships. com ● Fastweb. com ● collegeboard. org

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