Our North Carolina Probate, Estate, and Trust Administration Lawyers Explain What Happens to Your Loved One's Debt When They Pass Away
Imagine discovering that your recently deceased parents left behind a mountain of unpaid debts instead of an inheritance. It's a nightmare scenario that's becoming increasingly common as more seniors enter retirement carrying substantial financial burdens. But before you panic about inheriting a loved one's debt, our North Carolina probate, estate, and trust administration lawyers offer essential insights that could save you from financial heartache and legal headaches. Read on to discover how to protect your assets, understand your rights, and face the future with confidence in an era where "until death do us part" might not apply to debt.
How Common Is Senior Debt?
A recent survey conducted by CESI Debt Solutions in Raleigh, North Carolina reports that over 40% of seniors have accumulated debt in their retirement years with absolutely no plan to repay it before their deaths. Elder law attorneys across the nation can tell you horror stories about senior debt - stories about the adult children of a deceased client who walks into their office with a handful of letters from creditors, all making claims against their parents. This leaves many children wondering what their rights and responsibilities are as inheritors of their parent’s estate.
What Happens to Debts When Someone Dies?
In short, the debt incurred belongs to a person's estate. If a person dies with enough assets to cover their debts, creditors will be paid first. After creditors are paid, beneficiaries will receive what is left over.
If there isn’t enough to cover the debts, creditors may get some, but not all, of what they're owed. State law provides an order of priority for the order in which debts are to be settled if there are not enough assets to settle all of the debts. Family members generally don't become legally responsible for a deceased loved one's debt, but many worry they might.
Can I Inherit Debt in North Carolina?
The short answer is no, you cannot inherit a loved one’s debt in North Carolina. The only exception to this rule is if you are a co-signer on one of their loans (car payment, mortgage, etc.). If you co-sign a loan, you are strictly liable for the debt that the deceased still owes to the creditor. Please note that authorized users of an account have a different status than co-signers. Authorized users may have been given permission to use a credit card, for example, but they are not responsible for any of the debt incurred.
When your loved one dies, the probate process ensures that their estate is used to satisfy any outstanding debts they have and that their will instructions are followed. In North Carolina, the probate process follows five general steps:
- all assets in the estate are totaled up;
- funeral expenses, taxes, and administrative fees are paid;
- secured loans are paid (car payments, mortgages, creditors);
- unsecured loans are paid (credit card debt);
- the remainder of the estate is divided up among the inheritors.
As you can see, there are many steps that your loved one’s estate must pass through before the assets are passed to beneficiaries according to the deceased’s wishes. While you might not inherit their debt, the law requires that all creditors are to be repaid first. If your loved one has incurred substantial unpaid debts then it is possible that you will not inherit anything.
What About Credit Card Bills?
With the possible exception of a surviving spouse, generally, you are not liable for a loved one's credit card bills. Notify the credit card company of the executor’s or trustee’s address so that you will receive statements and can handle them while administering the other debts and expenses of the estate.
If the credit card was a joint account with a surviving spouse, then the surviving spouse should consider paying the credit card bill so that his or her credit rating is not impacted. If the expense belongs to the decedent, the surviving spouse can later be repaid by the estate. The surviving spouse should then stop using the joint credit card and instead arrange to have a card in his or her name only.
Generally, unless it was a joint account or another family member signed off as a guarantor on the account, the family is not responsible for the debt. Further, credit cards are “unsecured debt,” meaning that they are relatively low on the list of the order of priority in which debts are paid (though if there are sufficient assets in the deceased’s estate, they do have to be paid).
We have read and heard stories of credit card companies using tactics that border on harassment to pressure executors, trustees, or family members to pay the credit card debt or roll it over into their own name. If you are at all uncertain as to whether you are obligated to pay the debt, consult with your attorney first before making any payments.
How Can I Protect My Own Assets From Creditors After I Die?
Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009
This piece of legislation offers protection for heirs. One provision is that creditors cannot continue to charge late fees or annual fees when the estate is being settled. Your family should educate themselves about this law because the probate process can last anywhere from six months to a year or longer. During that time, every late fee and annual fee being tacked on to the account bill is eating away at the value of their inheritance.
Not All Assets Are Vulnerable to Debt
ERISA-covered employee retirement accounts, such as a 401(k), have named beneficiaries. This means they do not pass through the estate and thus, they are not subject to probate proceedings.
Have an Open Discussion With Your Family
Make sure that your family has a general gauge of your financial health and any substantial debts you might have. This conversation can make the probate process significantly easier and less stressful for them to go through in the sensitive days after you pass away.
Complicating Factors
There can be complex factors, though, depending on the type of debt incurred, where someone lives, and the value of the estate.
- Federal student loan debt is eligible for cancellation upon death, but private student loan companies typically won't offer the same benefit and may go after a deceased borrower's estate for repayment.
- If a home is the only asset and other people still live in it, that asset must still be used to satisfy debts—whether it's the mortgage or a large amount of credit card debt. The people who live there may have to assume the mortgage or sell the home to pay off the creditors.
- Debts incurred with co-signers or co-applicants can also result in those debts falling back onto someone else's lap (e.g., the other co-signers or co-applicants).
- If a person is married and lives in a community property state, then he/she might be responsible for the debt incurred by their spouse during the marriage, even if it was only in the spouse's name.
- Some states, including North Carolina, take the marriage vow of “in sickness and in health” to heart and hold spouses responsible for each other’s medical bills and medical debts.
