Now that we’ve provided a general overview of how debt is handled after death, there is another important piece to the puzzle: circumstances under which your debt can become someone else’s burden.
Co-Signers/Joint Account Holders
Any remaining debt will always be the responsibility of the co-signer or surviving account holder, not the estate. “When you agree to cosign, you are essentially accepting full responsibility for paying the debt if the primary borrower can no longer make payments,” says Sarah Siedentopf, owner of Siedentopf Law specializing in estate and probate law.
Federal loans are discharged upon the death of the borrower or of the student on whose behalf the loan was taken out after proof of death is submitted.
“Private loans, however, do not offer that same protection,” says Jessi Patton, an estate attorney who now helps other attorneys build their dream law practice at Juris Diction. “Lenders may choose to forgive loans after death, but essentially, they have the right to collect from the co-signer.”
This law states that any debts or assets acquired during a marriage are equal property of the marriage, regardless of whose name it’s in. There are 9 states which observe these laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
For example, if your spouse took out a student loan or any other debt during your marriage, it becomes your responsibility as well, even if the debt is only titled under his/her name.
Earnings and income are also considered “community property.” Technically, your income is owned by your spouse and vice versa.
The only exception is gifts and inheritances. If you inherit money, regardless of whether you received it during marriage, then it solely belongs to you.
Federal law determines how property is taxed, but state law determines whether, and to what extent, a taxpayer has “property” or “rights to property” subject to taxation. Therefore, the state in which you live has significant impact on your personal finances, particularly when it comes to assets and debts acquired during marriage.
This law obligates adult children to provide necessities for their impoverished parents and can extend as far as them being legally liable for a deceased parents’ medical debt. There are 29 states that observe this law, although it has rarely been enforced in the past.
It may seem unfair for someone else to be held responsible for your debt, but we’ll finish off the series next week with ways you can protect your loved ones against these scenarios.
THE BOTTOM LINE:
Debt isn’t typically inherited, but there are exceptions. Being aware of these exceptions is an important stepping stone to help guide your next steps in protecting your loved ones. Sadly, too many people find themselves dealing with aggressive debt collectors demanding payment in the midst of coping with their loss.