Can the Death of a Family Member Affect Your Credit?
About 7,500 people die in the United States each day, according to the Centers for Disease Control and Prevention. When one of those people is a family member, the fallout can be devastating. And though nobody wants to think about finances at a time like that, the fact is that the deceased often leave behind financial issues that must be rectified.
In some cases, the death of a family member can have an impact on your financial situation as well. If you were named as an heir or are the beneficiary of a retirement account or insurance policy, the financial impact can be positive. In other cases, the impact can be negative, and could even potentially damage your credit. (If your credit is already damaged, there are services that can help you repair it.)
Let’s take a look at how this happens, and how it can be avoided.
What happens to someone’s finances when they die?
When someone passes away, their debts are not canceled. Generally, family members are not obligated to pay the debts of a deceased relative. In fact, there are federal laws in place to protect relatives from abuse and aggressive tactics by debt collectors. Your state might also have similar protections in place. (To find out, check with your state’s attorney general’s office.)
Debts are usually paid from the deceased’s estate, at least to the extent that the assets cover them. It’s the job of the executor named in the will — or, in the absence of a will, a court-appointed representative — to handle the disbursement of the estate’s assets to heirs and creditors.
There are, however, some situations when you might be responsible for a relative’s debt after their death. These include:
- If you cosigned the loan or other type of debt obligation with this relative or spouse.
- If you live in one of several community property states, such as California.
- If you were the deceased’s spouse, some states make you responsible for certain debts such as health care costs. This can also apply to adult children in some cases.
- If you are legally responsible for resolving the estate of the deceased and you didn’t comply with certain state probate laws.
How can this impact your credit?
“You might have a lot of difficult issues to deal with when a family member dies, both emotional and financial,” said Valerie Rind, author of “Gold Diggers and Deadbeat Dads,” a book about financial hardships suffered at the hands of relatives and loved ones. “If you and your beloved had joint debts, like credit cards, the debts will not be wiped out just because one person died.” This could be a rude shock, she said, especially if you were not the one who ran up the debt.
Even if you were unaware of the debt, if you signed for it, you are usually responsible for paying it off after your relative’s death. You might want to seek the advice of an attorney if there is any question as to the extent of your liability for this debt obligation.
If your spouse is the one who died, and the debt was shared, you will still be responsible. This is true of debts like mortgages, personal loans, auto loans and credit cards in both names.
In community property states (California, Wisconsin, Texas, Nevada, New Mexico, Arizona, Louisiana, Idaho and Washington), you may be responsible for your late spouse’s debt even if you were not a cosigner or listed as a debtor. The rules vary widely in these states, so you would be wise to consult with an attorney who is knowledgeable on your local regulations. In other states, the rules will vary for debt incurred by one spouse when the other spouse was not a co-borrower.
If you are deemed responsible for a debt, it becomes part of your credit history. Should you default or make late payments, you can suffer the same penalties to your credit as you would for any other type of debt or credit obligation.
What are your options when faced with unexpected debt?
If you do find yourself legally responsible for the debt of a deceased relative, you will need to come up with a plan to pay it off. Depending on the size of the debt and the required payments, this could have an impact on your personal budget and finances. Here are some steps to consider:
- Look at a debt consolidation loan.
- Sell assets from the estate, and use the proceeds to pay off some or all of the debt.
- Reduce your overall spending, including on credit cards, and put the excess dollars toward paying off the debt.
- Put extra money, such as a bonus from work if applicable, toward retiring the debt.
- Talk to the creditors. You might be able to work out reduced payments, a lower interest rate or some other type of relief. Be sure to find out how much this might add to the total amount owed and whether it would harm your credit.
The bottom line
The death of a spouse or relative is a devastating personal tragedy. If possible, don’t let it be a financial one as well. If you can, take the time to understand the implications of any debt you and your loved one have incurred before tragedy strikes. It can only make things easier in the long run.