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Debt after death

January 09th 2013

Death can come as a huge blow for most people and it can affect you emotionally and financially. Some families may be left without a primary bread earner while there are even more unfortunate ones who end up inheriting the debts of the deceased. The old saying “The dead have paid their debts in full” rarely finds application in the modern economic scenario, especially in a financial system entirely hinged on credit. Most of the times, the family of the deceased might find themselves to be the inheritors of three of the most common kinds of debt an average American household carries;  medical expenses, student loans and credit card bills.

Generally, in case the deceased had a lot of financial obligations at the time of death, creditors are generally repaid through the deceased’s estate. In case the deceased’s debts are greater than his assets, creditors are assigned repayment priority and more often than not, some of the lower priority creditors go home empty handed and out of luck. In all the three cases which are going to be discussed, survivors of the deceased are generally not liable for any of the debts left behind but there are of course certain exceptions.

Credit card debt

As in the case of all other kinds of debts, survivors of the deceased are not legally bound to clear credit card debts the deceased had carried. If the estate is sufficient enough to clear up the debt then there are no issues of course but beyond that there are some technical pitfalls. The deceased’s estate might not be supple enough to take care of the bills but the survivors are legally not liable to repay the debt.

Exceptions to such cases arise when one of the survivors (usually the son/daughter or the surviving parent) was a joint holder of the credit card account, having co-signed for it. In such a case, the co-signer will be completely and legally liable for repaying the debt. Divorce followed by death is another situation altogether. Joint credit cards transferred between either party as a part of the settlement proceedings carry the same liability. If one of the co-signers dies, the other one is legally obligated to pay the bill.

Authorized users on the other hand are left without the burden of having to assume the deceased’s debt. The only problem arises if an authorized user continues to swipe the plastic even after the death of the card holder and of course has criminal implications.

Student loan debts

Student loans have been always tough to run away from. They are generally pretty large, requiring years to repay, carry a handsome interest rate and cannot be discharged through bankruptcy (extremely rare cases are there). A landmark case made it compulsory for lenders to discuss the scenario and possible repayment of the loan in case the student dies.

Situations wherein loans are forgiven in the event of the primary borrower’s death are rare and most private lenders require the co-signers to repay the loan in such cases. Private lenders rarely offer medical forbearance although some are known to give a three month forbearance due to hardship during which interest accumulates.

Federal student loans, on the other hand are known to forgive debts in case of the borrower’s death. In case of a permanent medical condition which leads to the death of the borrower, the loan is deferred as soon as a doctor’s note is submitted. Upon producing the death certificate of the deceased and related documents, the remainder of a federal student loan balance is cancelled almost immediately and no further collection efforts are made.

Medical debts

Taking care of medical bills of the deceased in the case there is no estate is somewhat easier and less complicated than dealing with student loans or credit card bills. In case the creditor comes to contact the survivors to collect on unpaid bills, the family members of the deceased can clearly state that there are no funds in the estate. The chances of creditors forgiving the debt upon hearing this is rare so there might be a few more things which need to be done.

The amicable thing to do would be to call up the creditor and negotiate a settlement which is 10 percent of the actual debt. Most likely, the creditor would accept the offer but in case they refuse you could just let them go ahead and file a lawsuit against an empty estate without any representatives. They will never get a penny out of it but would rather end up paying a lot of money in the form of court costs.

The easiest way to stop a creditor from trying to collect on medical debts of the deceased is to have the estate declared insolvent upon which a judge will issue the order of insolvency which will be served to all the creditors. It would effectively stop all collection efforts.

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