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What happens to your debt when you die? (Part 1)

Being named as the sole beneficiary of a relative's estate may not be what it once was with so many properties upside down and the nation's credit card debt at record levels. What do you do if you are willed a house in which the mortgage owed is more than the value of the house? Generally speaking, personal debt dies with the person, however as in all things in life, exceptions exist and estate and probate litigation laws vary state by state.

Michigan residents may be interested in what happens to various types of debts, such as student loans, mortgage notes, medical bills and car loans. As discussed in a previous post, an elderly resident owed the state for long-term Medicaid expenses after her death and so to recover that debt, the state put a lien on the property she willed to her children through the probate process.

What matters to the court is whose name appears on the title of the property and any guarantors on the debt in question. The executor of an estate will attempt to sell whatever collateral he or she can in order to pay off creditors with the proceeds. If the debt is greater than the value of the estate the remaining debt gets written off, unless there is a guarantor or co-signer on the debt, such as a joint credit card accounts. In that case the co-signer or guarantor is liable for the debt.

If you live in a community property state and one spouse dies, the laws can get even murkier. Even if you do not co-sign for a loan or have an account in both of your names and one spouse dies, the other spouse could be held liable for his or her debt - even if he or she did not know it even existed. Debt collectors will try any number of tactics to get surviving family members to pay off a debt, however you may not be liable, depending on the laws in your state.

In such cases, your best bet is to contact an estate planning and probate attorney who will help you to understand your rights and what debt you may or may not be held liable for. Every state has different laws encompassing the debts of a deceased person so you are better off knowing what's what before you agree to anything. Watch for our next post for more information on what happens a person's debt after his or her death, and ways you can plan ahead to protect some of your assets for future generations.

Source: CNBC, "Who Inherits Your Debt?," Shelly K. Schwartz, March 16, 2012

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