What to Do When a Loved One Leaves Only Debt

9:46 pm Probate

debt e1360610282486 What to Do When a Loved One Leaves Only DebtThanks to the housing market crisis and the Great Recession, there are plenty of people who leave only debt behind when they die.  Here is what happens to major sources of debt after death:

Mortgage.  Since a mortgage is secured debt (secured by the home for which the loan is made), it is not forgiven when the borrower dies.  Instead, it becomes part of the decedent’s estate.  If the estate has cash to cover the remaining balance, the home can then be passed to heirs.  If not, you can work with the lender to assume the mortgage, refinance or sell the home to pay it off.  If you can’t pay it off, don’t want it or the house is underwater (more is owed than the home is worth), you can just walk away and let the lender foreclose.

Car loan.  The process here is similar to that for a mortgage, since a car loan is a secured debt as well.  You can either pay off the loan from the estate, sell the car to pay it off, or work with the lender to assume ownership.

Student loan.  Student loans that are federally insured are forgiven upon death.  Private student loans are not forgiven and pass to the estate for payment.

Personal loan.  Personal loans are typically unsecured, and do pass on to the estate.  If there are not sufficient assets in the estate to pay these, the estate executor usually takes what is available and pays a percentage to each debtor.

Credit card debt.  This is unsecured debt that passes to the estate for payment.  However, if there are not sufficient assets, then creditors are often out of luck – although many try to convince vulnerable family members that they owe the debt.  And in community property states like California, if a surviving spouse or child inherits community property, they may be liable for the debt.

When a family member dies, creditors should be notified immediately.  But your first step should be to consult with a probate attorney before any debts are paid out of an estate so you know exactly which debts the estate is liable for paying.

Let our Costa Mesa law office help you get started by contacting us today.

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