For the part of your estate that goes through probate, creditors must file claims to receive payment debt payments from the estate. But what about debts connected to jointly owned property that automatically transfers to your surviving spouse? What about debts connected to property that transfer to your surviving spouse or beneficiaries through a trust?
We discussed these issues in our recent episode of our podcast titled Pay Your Parent’s Debt.
Which Debts Should Survivors Pay?
Whether your surviving spouse or beneficiaries should pay your remaining debts that pass outside of probate depends on the type of debt and whether survivors are jointly liable for the debt. It also depends on the finances of the survivors.
Secured debts are debts backed by collateral. Car loans and mortgages are the most common examples. If a surviving spouse becomes the sole owner of a home with a mortgage, they must make the mortgage payments. Otherwise, the mortgage company will foreclose. This sounds simple enough, but several factors can complicate the issue.
If you’re the surviving spouse, the first question to ask is, can you afford to continue making mortgage payments? Losing a spouse severely affects your income. Depending on your situation and after consultation with an attorney, it may be best to sell the house.
Unsecured Debt Where You’re a Codebtor or Guarantor
Since there’s no collateral with unsecured debts, there’s nothing for creditors to take — unless they sue you. The question is, can they sue you? If you were a joint account holder for the debt, or if you guaranteed the debt, creditors can sue you to collect the debt. If they win a judgment, they can take property or prevent the sale of the property unless the proceeds pay the debt first.
The key is to know whether you’re on the account with the decedent. If you are a joint debtor, it’s best to pay the debt if you can. If you can’t afford to pay the debt, you may need to settle with the creditor. It’s best to talk to an attorney before any settlement discussions with creditors or debt collectors.
Maybe the creditor will write off the debt and send you a 1099. Under §108 of the Internal Revenue Code, debt forgiveness is income, just as if the creditor had sent you a check. You’ll have to pay taxes on the income. But, these taxes are substantially less than the cost of paying full debt.
Unsecured Debt Where You Aren’t on the Hook
If it’s an unsecured debt that was only in the decedent’s name, don’t worry about it. You’re safe.
Get in touch for more information about estate planning custom-tailored for your unique situation. Or call us today at (801) 951-0500. At Voyant Legal, we look forward to protecting what matters most to you.