How Debt Is Handled After a Person Passes
More than 70% of Americans will die with some outstanding debt, according to the credit bureau Experian. For those with mortgages, the average amount of debt was more than $60,000 in 2016. Estate planning litigation lawyers, therefore, often have to tackle the challenges of what happens to that debt after a client has passed.
Debt Involving Multiple Borrowers
The first facet of the debt that must be considered is who is legally obligated to repay it. While many loans, credit lines, and so forth involve a single borrower, there are also joint and shared ownership loans that involve multiple debtors who are all equally responsible. There is also the concept of co-signing a loan in which the co-signer agrees to be legally responsible for the loan if the primary borrower cannot repay. In all of these cases, the remaining debtors are responsible for repayment. Some loans do have a successor clause, which requires the estate to be responsible in the event the remaining borrowers cannot fulfill their obligations. In such a case, the lender can have access to all assets that are not exempt from probate.
Community Property States
Generally, no person is responsible for the debts acquired by another. There are exceptions, however. Certain states, for instance, are community property states. Community property means that all assets and debts acquired during a marriage belong to both spouses. A wife in a community property state is therefore responsible for a loan her husband took out even if her name is not on it. Nevertheless, New Jersey is an equitable distribution state, which means that the debt is the sole responsibility of the estate.
Estate Responsibility for Debt
In most cases, a deceased person’s estate is responsible for debt repayment. It is worth noting that an estate does not have to be formally established via documentation drafted by a lawyer. An estate exists for all people and will be defined by the courts as needed. Lenders seeking repayment have access to all assets that are not exempt from probate. Retirement accounts and life insurance proceeds are examples of assets that are generally exempt from probate. There is also the concept of a small estate. A small estate is a simplified process that is an option in many states. In New Jersey, there must be no valid will, and property must not exceed $20,000. A small estate makes most assets exempt from probate.
What if an Estate Cannot Afford the Debt?
Whether an estate is responsible for a debt it cannot afford depends on whether the debt was unsecured or secured. In the case of an unsecured personal loan, for instance, it is an unsecured risk for the lender, which is then out of luck. In the case of a secured loan, the lender has access to the security, such as repossession of an automobile. Estate litigation can get quite complex when the estate has some assets to repay the debt but not enough for all the lenders involved.
One of the more confusing aspects of this process for beneficiaries is that they are often contacted by debt collectors. This is legal. Collection agencies can even request repayment. What they cannot do, however, is suggest to the beneficiary that he or she has an obligation. Still, many beneficiaries feel obligated just having been asked the question and should seek legal counsel.
Prepare Your Estate for Your Debt When You Pass
The Knee Law Firm in New Jersey oversees all aspects of estate planning, estate administration, and estate litigation. We encourage all clients to reevaluate their estates with us on a regular basis to ensure that their debt and all other facets are accounted for. If you are dealing with an estate and there is outstanding debt involved, then you may wish to speak with an estate planning litigation lawyer. To schedule a private consultation, contact us online, or call our Hackensack office at (201) 996-1200 today.