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What happens to your debt when you die? (Part 2)

As discussed in last week's post, what happens to your debt when you die depends on a number of factors, including the type of debt it is, whether it is secured debt, such s a home or vehicle, and the name on the title of the property securing the debt. If you live in a community property state you may be held liable for the debt of deceased spouse whether or not you actually co-signed for the loan.

It all hinges on the laws in your state. That is why an estate planning attorney can be useful in helping Michigan families effectively protect certain assets and properties.

If you do not live in a community property state and did not co-sign a loan or agree to be a guarantor on a loan you may not be liable for the debt. But that won't stop collection agencies from attempting to goad you into paying that debt by using such language as moral responsibility or other guilt language and threaten to put a lien on your property. Don't allow creditors to bully you into making any decisions until you have contacted a probate attorney and understand your rights and legal obligations to pay a debt.

Oftentimes debt collectors simply do not know the laws and rules in various states for the specific type of debt they are attempting to collect. Therefore it is up to you to know your rights if you are being asked to pay someone else's debts. When a person dies their debts are considered part of his or her estate and are put at the top of the priority list, before heirs. Generally, all debts must be paid before an estate can distribute any assets.

Again, depending on state law, some assets may be excluded from the probate in which claims against an estate are paid. This can include life insurance payments, retirement benefits and even real estate if the surviving spouse is named as a co-owner on the mortgage or title. As mentioned in an earlier post, this is where a probate attorney can be helpful in setting up an estate plan that protects certain assets in a trust or other legal instrument. The idea is to keep assets out of the probate process for a smooth transfer of an estate to its heirs.

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

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