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

Updated April 23, 2020

If your loved one died unexpectedly leaving significant debt behind, would you know what to do?

It's a worrisome question for everyone, especially in times of uncertainty such as the coronavirus (COVID-19) pandemic. Young or old, based on particular debt circumstances or geographic location, death with debt can provide significant problems for surviving family members. Depending on state law and the specific credit relationships involved, they might be shocked to learn that they could be legally liable for a deceased relative's outstanding debt – anything from unpaid mortgage balances and medical debt to unpaid credit card balances.

Spouses (http://www.practicalmoneyskills.com/unexpecteddeath) who may share any kind of debt jointly, particularly credit cards in dual name, could face greater challenges. It also may spell problems for co-signers of any kind of loan.

As with all financial planning, the best time to act is before an issue arises. Watching any family deal with extensive debt problems after a spouse or relative passes on illustrates the need for financial transparency while all parties are alive. No matter how difficult a family member's credit circumstances are, spouses and adult children should face those circumstances while options are available to deal with any problems.

Spouses can begin by requesting and sharing their three free annual credit reports (https://www.annualcreditreport.com/index.action) from TransUnion, Experian and Equifax to confirm debt status. Once that information is out in the open, it's time for the couple or family members to deal with specific circumstances related to that debt. For example, a young couple may have different debt issues than an older, retired couple, but both should consider how they would handle the debts of a spouse or legal partner after death. It can be helpful to meet with a qualified financial or estate expert about ways to extinguish or manage debt issues as part of current financial and estate planning.

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 other debts that 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 likely be discharged, but check with qualified experts first.

Any kind of debt held in joint name should be evaluated. Spouses, legal partners and family members who have co-signed loans or 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.

Experts also may suggest that co-borrowers without credit in their own names apply for a credit card in separate names while their spouse is still alive. A separate credit account, if responsibly managed, can help the survivor qualify for additional credit in their name after a spouse or legal partner dies.

Keep in mind that all debt situations are unique to the individual. For example, a senior who qualifies for nursing home care under Medicaid (public aid) may have family members who will need to sell the senior's home to address certain expenses after he or 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. In light of the recent COVID-19 pandemic, now may be a wise time to broach the subject with your loved ones so you’re prepared for the unexpected.

Bottom line: Dealing with a deceased relative's debt can add stress at a particularly worrisome time for spouses and relatives. The best option is transparency while relatives are alive so debt issues can be addressed as part of overall estate planning.