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What happens to a person’s debt after they die?

| Dec 16, 2020 | Estate Planning

Just because someone dies, it doesn’t mean all their debts are automatically paid off or forgiven. In some cases, their family members may even be responsible for paying them off. That’s why it’s essential to have an updated estate plan.

When a person passes away, their assets become their estate. Probate is the process of dividing up their debts. In Texas, creditors have four months to make any claims against an estate once executors provide a special notice, called the Permissive Notice to Creditors.

Estate planning debt checklist

Beyond the basic timeframe for creditors to file claims, here are some scenarios where debt must be paid or can be forgiven after death:

  • Are beneficiaries protected?: Creditors cannot typically collect any money from accounts, such as 401(k)s or insurance policies, providing your loved ones have completed a beneficiary form. If beneficiaries for these accounts are not named prior to a person’s death, these funds go through probate and are subject to collection efforts.
  • Must all credit card debt be paid?: Unfortunately, these balances do not disappear after death. They are usually paid from an estate’s assets. Children do not inherit these debts unless they are a joint holder of the account. Surviving spouses are typically responsible under Texas’ community property rules.
  • What happens to student loan debt?: Federal student loans are forgiven when the borrower dies, even when parents took them out on behalf of a child who passes away. However, no law exists requiring lenders to forgive private education loans.
  • Does a mortgage transfer?: Under federal law, lenders must allow family members to assume a mortgage if they inherit a family home. For children, this means they don’t have to apply for a new loan, but they can still refinance or pay off the note if they so wish. Surviving spouses are typically co-borrowers and automatically take over the mortgage.
  • What are spouses responsible for paying?: Surviving spouses are required to pay any joint federal or state tax debt. Under community property laws in Texas, spouses are not only responsible for paying off credit card debt, as mentioned above, but any other debts their spouse may have accumulated, even if the survivor didn’t know it existed.

Updating an estate plan is crucial

Too many people believe estate planning is the same thing as creating a will. While that’s one possible component, an estate plan is an integrated individual strategy encompassing asset distribution, medical planning, guardianship for minors, charitable giving and protecting you and your family’s future by managing assets while you are alive and after your death.

Working with an experienced estate planning attorney is vital to accomplishing these complicated and multifaceted goals. Your lawyer is dedicated to helping you pass along as much of your estate as possible to future generations by reducing liabilities.