When your spouse/partner dies, what happens to any debt they had or that you shared jointly? Are you responsible for any money owed? What will happen to your credit rating?
With household debt in the U.S. and Canada being at or near all-time highs, chances are the death of your spouse will bring questions about these financial obligations.
Disclaimer: Since you’re reading this on the WORLD wide web, the following information is general in nature and is intended for information only. Laws regarding debt and estates vary from place to place. Depending on which part of the world you live in, what follows may not be precisely applicable. I highly advise you to familiarize yourself with the laws pertaining to your part of the world and seek specific advise from a knowledgeable advisor in your legal jurisdiction.
What the Estate Pays
First, debt that was held solely in the name of your spouse, will be paid off through the estate settlement process. Part of the executor’s role is to pay any money owed by the deceased, since it is the estate which “inherits” these obligations, not the heirs. Normally this means probating the estate will take extra time and that the heirs will receive a lesser amount (if anything) after everything has been paid.
The executor has to ensure all forms of debt are cleared including mortgages, lines of credit, personal loans, student loans, auto loans, credit cards, any level of taxes owed, outstanding bills, and there may even be other legally binding obligations.
If the estate has more than enough cash or assets to cover what’s owed, the impact may be minimal. Abundant liquidity isn’t always the case when a spouse dies though. If that’s what you’re facing, here are some points to consider.
What You Have to Pay
As mentioned, generally debt that was held solely by your spouse is not your responsibility. There can be exceptions to this if you live in an area where “community property” laws apply. In this case, the surviving spouse can be held responsible for the debts of the deceased even if their name wasn’t on the account. This can be real shock at a time at a time when you’re grieving. You and the executor of the estate will need to be very clear on whether or not this pertains to you. When in doubt, seek proper legal guidance.
Debt that was held jointly, such as a mortgage, will become your responsibility if there was no pre-planned method to pay it off in the event of either of your deaths. For large debts, such as a mortgage, an adequate life insurance policy may be required by the lender. Of course, you can use the proceeds from any policy, such as group life insurance, to pay off any remaining mortgage or other debts.
If you co-signed for any loans with your spouse — lines of credit, auto loans, etc. — you will be responsible for that debt. Again, hopefully you can service the loan on your own, the estate has the means to pay the loan off, or there is enough life insurance that can clear it.
In the case of outstanding credit card debt, you’ll be responsible if you are a co-signor on the card, i.e. it’s a joint account. If you’re only listed as an “authorized user” but not as a co-signor, you won’t be held responsible for any amount on the card, but again the estate will be.
What if You Can’t Pay?
In the event you’re left with debt after the estate is completely settled and find you cannot make the payments, you will have some tough choices to face. Not paying the debt will impact your credit rating negatively. It’s best to take action before collection agencies start knocking on your door.
Begin by getting advice. Start with your financial buddy, or perhaps the executor of the estate. You should also talk with your bank, or with whomever the debt is owed. It may be possible to renegotiate the terms of the debt to fit within your budget. Another solution may be to consolidate your debts into something that is manageable. While this can be a solution, there are also risks to using debt to pay of debt you should consider before doing that. You may want to seek advice from a non-profit credit counselling agency in your area before making any firm decisions.
4 Ways to Knock Down Debt
If you are able to handle any remaining debt but want to eliminate it quickly to release yourself from the burden, here are four ways to knock it down:
Use the “snowball method”. This is where you begin by making the minimum payment on all your accounts but put extra money towards your smallest account. The accelerated payments will get that account cleared first. You then tack the money you were paying on that bill to the next smallest debt, to clear that one faster and so on. I like this method because psychologically it gives you a sense of accomplishment as you see your debts getting knocked down one by one.
Reduce spending and put the proceeds towards your debt. Look for ways to trim your expenses such as eliminating unused subscriptions or memberships, or paring down your cable bill and using a cheaper streaming service instead. Give a serious review to all your discretionary spending.
Get a second job. I appreciate that if you’re already working full time, the thought of working even more can be unappealing, especially if you have kids at home. However, earning more income doesn’t need to be hugely onerous and can make a significant impact on reducing your debts. Here’s a list of 31 easy side jobs to boost your income.
Sell assets. How heavy your debt load is will have a bearing on what you may need to consider selling to reduce that debt. In extreme cases it may mean selling your home. In minor cases it could give you the incentive to purge your house of gently used but no longer wanted items in a garage sale, or through kijiji, or Craigslist.
Dealing with debt after the death of your spouse is never going to be pleasant, and not always easy. Left unattended though, there can be negative consequences for your own credit rating going forward.
In my next post, I’ll discuss credit ratings and what to do if you have a low credit score, or no credit score of your own.
Photo Credit: Niels Steeman on Unsplash
