Paying Debt for Deceased Spouse
Dealing with the loss of a deceased spouse is heartbreaking. The situation can, unfortunately, be made even harder if there is a lot of debt that needs to be resolved.
Deceased Spouse and Debt Repayment
Dealing with debt after the loss of your spouse can make a difficult situation even harder. While it might seem that death should wipe out debts owed, that is not the case. This is especially true if you live in a community property state. These states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (community property law also applies in Alaska in certain circumstances). In community property states, a husband and wife are responsible for paying the debts of the other even after the other spouse dies.
Executor and Estate
Most people are not able to tie up their financial affairs and debts before they pass. And there are a lot of things that have to be taken care of including property and outstanding bills. The person who makes decisions regarding the deceased’s property and debt is called an executor.
An executor must first determine how much property the deceased person had upon death. This property is referred to as the deceased’s estate and it includes all the property, including: houses, cars, personal property, and household possessions. The executor also must calculate how much debt is still owed. This debt will need to be paid from the estate, if possible. If not, the executor must decide if the property needs to be sold so that the proceeds can be used to pay the debt.
In community property states it does not matter whose name is on the bill. This means that a husband and wife are equally responsible for paying debt of their deceased spouse. If one spouse owes money, a creditor is able to sue and get a judgement against the remaining spouse.
A spouse is not responsible for paying another spouse’s separate debt. This means debts that were accrued before the marriage.
Dealing with significant debt after a spouse passes away can be overwhelming, especially if the estate is not enough to pay the debt. In these cases, you might want to consider working with a debt consolidator or a bankruptcy attorney to determine your options.
What Can You Do?
When you’re facing large amounts of debt after a spouse’s death, the situation can feel pretty hopeless. It makes sense that people often turn to debt consolidation. Stream-lining debts can help to free yourself from financial burden while lowering costs. But you’ll want to understand just what debt consolidation is so that you can decide if it’s for you. If you’re able to pay off your debts within 6 months to a year, you might just consider being really strict. If you look at your debt and see years and years of potentially impossible saving, then you might consider debt consolidation.
What Debt Consolidation Companies Do
Here’s what a debt consolidation (a.k.a. debt management or credit counseling) does:
- Closes credit accounts so you cannot use them.
- Sets up an automated monthly payment based on your budget that gets distributed it to your creditors.
- In some cases, they can negotiate lower APRs or reduced late fees with your creditors
What Is Debt Consolidation?
Debt consolidation means that all of your smaller loans get paid off with one large loan. So you essentially get one lump sum to pay off your smaller loans so that you only have one monthly payment rather than several monthly payments. The their behind this is one payment is easier to manage than several. And the main goal is it lower the interest rate and monthly payments while paying off your debt in a quicker amount of time.
It’s important to note that debt consolidation is not the same as debt settlement. Debt consolidation allows you to pay your debts in full without causing negative consequences to your credit. Debt settlement is the process of paying off debt to a creditor once a mutually agreed to sum is reached. This sum is usually less than what is owed. Typically, only unsecured debt (for example, credit cards and medical bills), is eligible for debt settlement. Debt settlement is often considered a risky process.
Understanding Secured vs. Unsecured Loans
A secured loan, such as a mortgage or a car loan, means you pledge the property, your home or your car, to secure the repayment of the loan. Here’s an example: you obtain a mortgage loan – the house is security for repayment. If you do not make the home, the mortgage lag lender can take the house back through the process of foreclosure to satisfy the loan.
Unsecured loans differ in that they are based only on your promise to pay. These loans are not secured by property that can be foreclosed on or repossessed to pay back the loan. Credit cards and student loans are technically unsecured loans because there’s nothing that can be directly repossessed if the borrower does not pay the loans back. Unsecured loans have higher interest rates because they carry more risk for the lender.
Debt Consolidation Through Secured Loans
Debt consolidation is a little easier when it comes to secured loans. Because there are physical “securities” that exist for repayment, they are seen as safer for the lender. For example, you can refinance a home, take out a second mortgage, or get a home equity line of credit. Another example is your car loan – the automobile is used as collateral in case you cannot pay back the loan. Assets can also be used as security for a loan. A 401K loan uses your retirement fund as collateral. Life insurance policies can be used if they have cash values. Financing firms can often loan you money against lawsuit claims, lottery winnings, and annuities.
Pros of Consolidating With Secured Loans
Often, secured loans carry lower interest rates than unsecured loans because they are safer for lenders. This fact can help you save your money on interest payments. Lower interest rates tend to make monthly payments lower and thus more affordable. Rarely, but in some cases interest payments are even tax deductible.
Cons of Consolidating With Secured Loans
The biggest con of consolidating with secured loans might seem obvious: when you pledge your assets as collateral and you cannot pay back the loan, you are putting your property at risk of being foreclosed on or repossessed. If you’re unable to pay the loan back, you run the rid of losing your house, car, life insurance, retirement fund, or whatever else you might have used to secure the loan. And certain assets, such as life insurance or retirement funds, may not be available to you if the loan is not paid back before you need to use them.
Debt Consolidation Through Unsecured Loans
Unsecured personal debt consolidation loans used to be quite common, but they are less likely to be available to people seeking them today. Usually this type of loan requires a borrower to have very good credit. A credit card or personal loan debt for consolidation is often given with a no interest, or low interest, introductory rate. Often times this amount balloons after a specified amount of time.
Pros of Consolidating With Unsecured Loans
The biggest benefit to unsecured debt consolidation loan is that no property is placed at risk. Also, an interest rate might balloon to higher than the rate on a secured loan, but it can often be distributed over several different credit card balances, thereby lowering your interest burden and your payment.
Balance Transfer Options
Balance transfer options on no-interest or low-interest credit card offers can be a very useful tool, but they can often be tricky. Check there is no transfer fee in the fine print which negates the savings. Also, the no-interest or low-interest period is generally limited to a set amount of months. You’ll want to be sure you can pay the debt off during this time. If not, you run the risk of paying a much higher interest rate once the period expires.
If your debt is too high to be consolidated, you might want to consider bankruptcy. A bankruptcy attorney will be able to look at your financial situation and determine if bankruptcy is a viable option for you. They will also evaluate your options for avoiding bankruptcy if other options exist. There are many different ways to discharge your debt and find the financial relief you have been looking for.
Working with a Bankruptcy Attorney to Help Consolidate Debt
At RHM LAW LLP, we will help you explore all of the debt relief options available to you. Though we specialize in bankruptcy law, we do not suggest bankruptcy as an option if we do not think it is the best option for them. We are committed to helping our clients resolve their debt problems, achieving true debt relief and avoiding potential debt consolidation scams. Contact us for a free consultation.