Debt and the Deceased: How Should Spouses and Heirs Proceed?

04/01/2015 12:26 pm ET | Updated Jun 01, 2015

When a loved one dies, is it possible to inherit their debt?

It's a serious question for heirs, and particularly for couples who hold debt jointly.

In most cases, a deceased person's debts fall to their estate for payment. However, depending on state law, shared credit relationships and the amount of debt in question, surviving family members may be shocked to learn that they could be legally liable for remaining debt that they weren't aware of or had expected their loved one's estate to cover.

That's why it's wise to include debt planning in individualized estate planning as early as possible.

Here are some options and issues to consider when planning ahead:

Be honest about your financial situation. It is not always easy for certain family members to admit they have debt issues, particularly older Americans who had hoped for better financial circumstances at the end of their lives. So parents and their adult children or spouses should fully disclose outstanding debt matters that could affect the borrower's estate. Spouses should consider requesting and sharing between themselves or other family members their three free annual credit reports from TransUnion, Experian and Equifax as a way to confirm their debt status.

Seek qualified advice. A young couple may have different debt issues than an older, retired couple. Borrowers should consult a qualified financial or estate expert in their state of residence for ways to extinguish or manage debt issues as part of current financial and estate planning.

Organize documents. Consolidate relatives' important financial documents in a centralized location. Ideally, all asset, debt and tax documents would be part of an organized filing system and kept current. But that is not always the case. After consolidating essential financial documents, you can take next steps to resolve outstanding debt.

Know what needs to be repaid. It is particularly important for borrowers and their executors to know what categories of the deceased's debts will likely need to be repaid after their death and which debts might be canceled or forgiven. Generally, certain forms of unsecured debt held in the deceased's name alone -- like credit cards or federal student loans -- may be discharged. Check with qualified experts first.

Train the executor. Collection agencies have a right to try to collect on any outstanding debt they are hired to pursue, even if the survivors may not be legally bound to pay the debt. Survivors need to know what debt is left behind and whether the estate or individual family members might be liable. Once this is established, the executor should be informed about this issue, and if possible, the borrower should leave expert notes about how the executor will be expected to respond in specific situations.

Examine joint debt. Family members who have joint credit accounts of any kind risk payoff responsibility for that debt if their co-borrower dies. Experts can advise how to deal with individual situations, but they may suggest that co-borrowers without credit in their own names apply for a credit card in separate name while their spouse is still alive. Separate accounts allow individuals to build a credit record separate of their spouses, which may become necessary after that spouse dies.

Prepare for special debt situations. All debt situations are different, and getting qualified advice and planning can help. For example, a senior who qualifies for nursing home care under Medicaid (public aid) may have survivors who need to sell the senior's home to address certain expenses after she has died. It is best to prepare relatives for that possibility in advance. Separately, a healthy senior relative may leave a home to heirs still under mortgage, or there could be a significant tax debt. Airing and reviewing these issues in advance can either prepare relatives for certain realities or enable them to solve problems while the relative is still alive.

If a loved one or partner dies suddenly without any planning mentioned above, here are immediate actions to take:

Gather information and advice quickly. Sudden grief makes dealing with money issues difficult. Nevertheless, move quickly to get qualified advice and gather key documents related to the deceased's overall financial picture, including current debt documents.

Guard against I.D. theft. Identity thieves watch death notices and try to gather a deceased's credit and other personal data from a variety of sources. Once family members locate all relevant estate and credit documents, it's important to notify the three main credit bureaus above and the deceased's lenders to let them know the borrower has died. If any accounts are held jointly, the co-borrower may be advised to remove the deceased's name from the account.

Bottom line: Anyone can die leaving debt behind. Spouses and families should help prepare or revise estate plans to address current credit issues and create an action plan for the possibility of remaining debt after the borrower dies.

Jason Alderman directs Visa's financial education programs. To follow Practical Money Skills on Twitter:

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