What Happens To These 5 Debts When You Die?

After a loved one dies, unpaid medical bills are probably the last thing you want to think about. But if a bill collector contacts you about medical bills after the death of a loved one, you may wonder if you have to pay

Generally, any debts a deceased person leaves behind get paid out of the individual’s estate. If there’s not enough money or assets in the estate, debts typically go unpaid. That means relatives are usually not required to pay their deceased loved one’s debt — but there are some exceptions. For example, surviving spouses in community property states may have some responsibility to pay off debts (more on that below).

Looking specifically at medical debt, your obligations may depend on your relationship to the deceased and the laws in the state where your loved one lived.

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What Is an Insolvent Estate?

An insolvent estate is one that doesn’t have enough assets to pay off all or even some of the decedent’s bills. The total is equal to or less than the debts he owed when the value of his probate estate is tallied up.

The personal representative must prioritize payment of the decedent's bills according to state and federal law when an estate is insolvent. These statutes dictate which creditors should be paid in full, which will receive only partial payment, and which will get absolutely nothing.

Creditors typically do not divide up the available cash and assets equally when an estate is worth $500,000 but the decedent left $600,000 in debt. The available $500,000 would not necessarily be divided up among 25 creditors in equal $20,000 increments.

Medical bills take precedence in some states if they were incurred within a certain period of time before the decedent's date of death, usually 60 days. The personal representative would have to pay these and other "priority" debts first, and creditors such as credit card lenders would then proportionately share in any money that's left over.

Unfortunately, the decedent's beneficiaries or heirs-at-law typically receive nothing when an estate is insolvent, but neither are they responsible for paying off the balance of the decedent's unpaid debts. The companies that weren't paid in full usually have to write off their debts.

Can items be taken to pay debts?

Creditors have access to most items listed in your estate, but there are a few things that they do not have access to. Assets that may be used to pay off debt could include:

  • Real estate
  • Vehicles
  • Securities
  • Jewelry
  • Antiques
  • Family heirlooms

What cannot be taken to pay off debt includes life insurance benefits, retirement accounts and living or irrevocable trusts. With so many assets that can be seized, it’s important to keep track of what you own and what you still owe. With careful planning, you can protect and preserve much of your estate to be handed down to your beneficiaries.

For example, you might use an irrevocable trust to protect your assets and potentially lower your estate taxes. Assets that are placed in these trusts no longer belong to you once the trust document is filed. Be aware, though, that the assets placed in these trusts cannot be moved back into your name once the trust is in place.

Protecting your heirs with life insurance

In the event of your sudden demise, your life insurance policy could become your family’s biggest source of financial support, especially when everything else is taken away by creditors. Life insurance, much like other payable-on-death benefits, is safe from creditors and the money belongs to your beneficiaries. Even in the absence of sufficient assets in the estate to pay off debt, the life insurance benefit cannot be used for the purpose by creditors. Your beneficiaries, however, can choose to use the money as they wish, and if the benefit is big enough, it may be used to pay off a mortgage or other loans. The money from life insurance also ensures that your family can continue living in the house after your demise and carry on with normal life.

When searching for a life insurance policy, it may be helpful to shop around and get quotes from multiple providers. Doing this makes it easier to get a sense of what coverage options are available, what the associated costs may be and what policy might work best for you. It may also be beneficial to get quotes and weigh options from some of the best life insurance companies to find out which companies offer the most competitive rates and policies.

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If the Decedent Received Medicaid 

States typically reserve the right to seek repayment of Medicaid benefits even when the decedent leaves an insolvent estate. This has the effect of pushing these debts to the front of the "priority" line for payment in insolvent estates, although the state typically can't pursue relatives for payment or attempt to collect if the decedent left a surviving spouse who is still alive. 

Medicaid rules can be extremely complicated, and they can also vary from state to state. You'll want to speak with an attorney to find out where you stand if your parent or loved one was receiving these benefits.

What Happens to Student Loan Debt?

You’re in luck if you have federal student loans because they will be discharged if you die. That means they won’t have to be paid. Any PLUS loan your parents took out to pay for your college education also will be discharged if you die. A family member will need to provide your loan servicer with a death certificate to prove your death and have the loans discharged.

You’re not so lucky if you have private student loans. “There’s no official discharge of private student loans, unlike federal student loans where the debt dies with the debtor or student borrower,” Tayne says. If the loans are in your name only, assets from the estate can be used to pay what is owed if the lender doesn’t discharge the debt.

If you have a co-signer for a student loan, that person will be responsible for what is owed. In fact, some lenders include clauses in their contracts that require the balance to be paid immediately if a co-borrower dies, Tayne says.

Of course, a life insurance payout could be used to pay off what is owed. However, the co-signer might be able to negotiate with the lender to amend the contract after the other co-signer’s death. It could help to work with a debt relief attorney who has experience negotiating with lenders in this situation.

Whose Debt Are You Responsible For? 

Worrying about the medical debts of a deceased loved one is not a main priority after their death.

Yet, debt collectors from hospitals, nursing homes, and even Medicaid will eventually begin reaching out to touch bases regarding how they will get paid for the deceased’s outstanding medical bills.

So what role do you play in handling these payments if you are a spouse, child, or next of kin?

Parents

According to CNN Money, 30 states require adult children to cover medical bills after a parents’ death under “filial responsibility” statutes. You must check the state’s laws that your parent(s) resided in to determine your role in the debt collecting process. 

If your parent resided and received medical care in a nursing home before their demise, don’t be surprised if the facility reaches out to you regarding outstanding balances. Some jurisdictions allow nursing facilities, long-term and acute care, to contact adult children to handle debts that the estate doesn’t cover. 

These laws differ from state to state, so be sure to do your due diligence to determine if you are liable for covering these medical debts. 

If you are the executor of your decedent’s estate, it is your responsibility to cover the remaining medical bills with their cash, valuables, or assets. 

It is wise to seek legal advice from a financial attorney regarding the laws and payment options to ensure you are paying what is needed while avoiding any unnecessary payments on your part. 

Doing this can relieve you of any overwhelming feeling you may have during this process. 

Spouse

As the surviving spouse, one’s responsibility for their deceased partners’ medical debt is similar to that of the child and parent.

Once again, depending on the state of residency, there is one unique legal distinction that determines a person’s ties to their spouse’s debt. Residing in a Community Property State determines whether or not you are undeniably responsible for medical bills after the death of a spouse. 

These states have laws declaring that all assets, valuables, or debts acquired DURING the marriage belong to both partners once you become married. 

Here are the current Community Property States:

• Arizona

• California

• Idaho

• Louisiana

• Nevada

• New Mexico

• Texas

• Washington

• Wisconsin

• Alaska (with a signed legal agreement between both partners)

Siblings or Other Relatives 

Under the circumstance, your loved one does not leave a will appointing an executor for their assets; you may become responsible for an existing debt if you are their next of kin. 

The court may appoint you or another family member as a personal representative to manage the estate. 

As long as you are not the co-signer of any of these assets, this will not affect your personal finances. However, you will be in charge of handling your relatives’ assets to cover their outstanding medical debts after notifying creditors of their passing.

Even though, under these circumstances, your finances are not in jeopardy from the debt, still do not be reluctant to seek professional assistance from a lawyer or an accountant. Ensure that you settle the debt correctly and there are no fraudulent claims on behalf of you or your loved one.  

What Can Creditors Take From an Estate?

Legally, creditors must be notified of a debtor’s passing by either their executor or family members. Creditors then have a specific time frame (usually three to six months after death, depending on the state) to submit a claim against the deceased’s estate.

Thankfully, there are a few things creditors can’t touch, including life insurance benefits, most retirement accounts, and the contents of living trusts. (This doesn’t apply if there are no living beneficiaries listed in the person’s will, though, so be sure to keep those updated!) But that beloved boat, prized coin collection or anything else that has value can easily end up being liquidated (sold for cash) to cover your debts if necessary.

Here’s the reality: Debt collectors aren’t much better than grave robbers. Even when you pass away, credit card companies still want their money, and they have no problem calling your grieving loved ones to try and get it. But it is illegal for creditors to try to get money from a deceased person’s relatives unless they’re a spouse, parent of a deceased minor, guardian, executor or administrator of the estate, or they cosigned or are legally responsible for the amount owed.2

If you’re another family member getting these calls, you can tell those heartless creeps to buzz off!

Final Thoughts On What Happens to Medical Debt After Death 

National Debt Relief states that hospitals are the leading cause of medical debts, prescription drugs are the second leading cause, and doctor bills are the third. 

As a result, medical debt ranks number 1 for bankruptcy filings compared to other types of debt. 

If your loved one passes away with outstanding debt, don’t panic. Learn what is required of you by checking out your state laws and act accordingly. 

Don’t hesitate to contact a financial professional if you are uncomfortable handling payments alone. They will assist you with any clarification needed regarding the medical debt collectors that are contacting you. 

After death, medical debt can be stressful to deal with on top of your grievance if you let it. Some people are not even aware that they are responsible for their deceased loved ones’ debt, so collectors, unfortunately, blindside them. 

Being prepared for any foreseen or unforeseen circumstance will allow children, siblings, and the spouse of a deceased individual to know their role in paying off any medical bills after death. 

Remember, your loved one’s estate will pay off the medical debt after death in most cases. The finances of a relative will rarely be affected. 

If you are an individual who wants to avoid leaving a massive amount of medical debt after death, there are ways to help you relieve or pay down your debt. Choosing to follow this route can provide peace of mind to family members in the future. 

Will your debts be forgiven or are they transferable?

Since your debts are transferred to your estate when you pass away, if your liquid assets (such as checking and savings accounts) are large enough to cover them, no debts will be passed on to your spouse or heirs. The situation becomes more tricky if:

Anyone cosigned one of the loans or is a joint account holder for a credit card You have secured loans (such as auto loans or a mortgage) that exceed the value of your liquid assets You live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin)

In these situations, whether a debt is forgiven, transferable, or be passed along to your immediate family will vary according to the type of debt.

Student loans after you die

Federal student loans are forgiven when the student passes away. Similarly, federal PLUS loans are forgiven when either the student or their parent dies.

The rules for private student loans vary according to the lender and state. While some private lenders, such as Sallie Mae, will forgive the loan when you pass away, most will attempt to collect from your estate. If your estate doesn’t have enough money to cover the loan, it may only impact your family if:

They cosigned the loan, in which case they would be responsible for paying it You were married when you obtained the loan and live in a community property state, in which case your spouse would have to pay it

If you don’t live in a community property state and no one cosigned the loan, the lender may attempt to collect from your estate but has no recourse if there’s not enough money. So, the student loan will go away as the lender can’t collect from your family.

Mortgage loans when you die

Your house isn’t usually considered part of your estate. So, for example, if your credit card debts exceeded the value of the rest of your assets, the credit card issuer wouldn’t be able to put a lien against your home. However, a mortgage loan is not forgiven when you pass away and it will need to be paid.

Your spouse or the person that inherits your house will typically have the option to take over mortgage payments when you pass away. If they’re unable to make the mortgage payments and your estate cannot cover the outstanding mortgage, the person that inherited the house will have to sell it and pay back the mortgage. Otherwise, the lender most likely will foreclose on the property.

Credit card debt after your death

When you pass away, the executor of your estate should notify credit card issuers as they will stop adding on any fees or penalties to the outstanding debt until the estate is settled.

Joint cardholders are responsible for an outstanding bill if you pass away. Authorized users of the credit card are not. However, if an authorized user attempts to use the credit card after you pass away, it could be viewed as fraud or they could be held responsible for any balance.

And a spouse could be held responsible for the debt if you lived in a community property state.

If you didn’t have a joint cardholder or did not lie in a community property state, then the balance on the cards after your death would be collected from your estate. Any other fees or penalties would not have to be paid.

What happens when you die with medical bills?

Medical debt is somewhat more complex but, assuming you didn’t receive Medicaid, your family would likely only be held responsible if: They made a financial commitment or guarantee to the medical institution. Given the high cost of care, this is often requested when a family member stays for an extended period at a hospital or nursing home. In addition, if your family’s legal relationship to you involves a “duty of support” or if they claimed you as a dependent, they could be responsible for the cost of your care.

While the majority of states have filial responsibility laws, these are rarely enforced. Filial responsibility laws can require any adult children to pay for medical bills that weren’t covered by your estate. If you received Medicaid, the state could file a claim against your estate for any money spent on your medical care after age 55. There are some caveats to this, so it’s a good idea to check your state’s regulations. However, this debt would not be transferable to your heirs and family members.

Car loan after your death

Car loans are not forgiven at death so, if your estate can’t cover the debt, the person that inherits the vehicle needs to decide whether they want to keep it. If they do want to keep the car, the inheritor can take over the auto loan payments and maintain possession of it. Otherwise, the car could be repossessed by the lender.

Medicaid Saved Us

This was all new to me. I figured someone would take care of the hospital bills, but I didn’t know who.

I just assumed that’s what happens when someone passes. I thought it’d be enough for a family to grieve over a loss without asking them to worry about medical costs.

My aunt is the one who took the leadership role when it came to the medical expenses. She didn’t want me to worry about the $600,000 bill on top of everything else.

She applied for Medicaid for my mother’s hospital bills about two months after she passed. The letter of approval we received a month later was the best news that we had heard in a while.

The Florida Medicaid plan was now going to cover my mom’s 20-plus medical bills.

It’s such a relief when money is one less thing that you need to worry about. It would have helped if my mother had health and life insurance, but my family and I still managed to work with each other and the providers to get everything worked out.

While unexpected events happen more often than we like, it’s important to expect the unexpected. However, not everyone has that opportunity or foresight. My advice: Take a breath, embrace what you have, and should something sudden come your way, don’t panic. There are people out there who are willing to help with your medical debt if you ask.

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