Who Inherits Your Debt?
That can include life insurance proceeds, retirement benefits and even real estate, if the surviving spouse’s name is listed on the mortgage as a co-owner.
In certain cases, such assets can be passed directly to the beneficiary named in the will, keeping those assets outside the estate and safe from hungry creditors. A probate attorney familiar with your state law can advise on specifics.
Community Property States
The rules related to debt are slightly different, however, if you are married and happen to live in a so-called community property state — California being the most notable — where all property (and debt) acquired during a marriage is considered jointly owned.
Thus, you may be responsible for paying off your husband’s midlife crisis sports car after he dies, even if you never knew it existed or agreed to co-sign for the loan, says Frye.
Other community property states include Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, but their laws differ slightly. Here again, a probate attorney can advise on specific state laws.
Nursing Home Costs
Regardless of where you hang your hat, you may also be required to pay for your spouse’s nursing home expenses if he or she had Medicaid , the federal low-income health program, pick up the tab.
Gideon Rothschild, a partner and co-head of trusts and estates practice at Moses & Singer law firm in New York, says it’s common strategy for the healthier spouse to invoke “spousal refusal” and refuse to pay for such expenses incurred by their husband or wife.
The spouse needing the nursing home then claims “no assets” and Medicaid steps in with financial assistance — at least until that person dies.
At that time, says Rothschild, the federal government may come after the surviving spouse for payment.
“If the surviving spouse has significant assets, the government may sue him or her to recover the amount they paid out, or put a lien on their home,” he says, noting the government typically would wait to collect from the proceeds of the sale of the property after the second spouse passes away.
While the couple’s estate eventually does settle their debt, Rothschild says, getting Medicaid to pick up the bill while both parties are alive is often good planning since the government is charged far less for nursing home expenses than a consumer.
Student loans are a separate matter entirely.
Federal loans, including the Perkins and Stafford, offer loan forgiveness provisions if the student borrower dies before the debt gets repaid, says Mark Kantrowitz, publisher of financial aid website Finaid.org.
Likewise, the balance on federal PLUSloans for parents gets dismissed if the borrower or the student for whom the parent is borrowing passes away with an outstanding balance.
Private banks are not so forgiving.
“Some lenders are still really obstinate on this issue,” says Kantrowitz.
Starting in 2009, a handful of lenders, including Sallie Maeand New York State Higher Education Services Corp., started offering “discharges,” which wipe the slate clean if the student borrower dies or becomes disabled.
But not all of their competitors have followed suit; some still force co-signers \(usually grieving parents\) to pay up.
“If your loan is not covered by one of these policies you can still ask the lender for a compassionate review process,” says Kantrowitz, adding the success rates vary by lender.
Don't Be Bullied
If you do not reside in a community property state and you didn’t co-sign for the loan, chances are you are not responsible for your spouse’s debt when he or she passes away.
But that doesn’t stop creditors from trying to collect.
Some credit card companies will send legal notifications to surviving family members, indicating their responsibility to pay off the decedent’s (deceased person's) debt.
Other lenders will threaten a lien against the house of the surviving spouse until the outstanding balance is paid.
Don’t allow yourself to be bullied, says Frye.
“Debt collectors will be very creative and persuasive,” he says, noting they themselves often do not know the laws regarding who’s responsible for debt. “They will also use terms like ‘moral responsibility’ and use the ‘guilt’ weapon against family members.”
His advice? “Tell debt collectors to take a hike,” and contact your attorney.