Ever wondered what will happen to your debt after you are gone?

Know how to make a will

What happens to debts when you are gone

If you have taken a mortgage be it a home loan, a car loan or any personal loan or credit card loans your are obviously a debt person. Many a times when you take any loan your banker is clever enough to tell you that after you are gone or on your death all your debts will vanish. But this is not true. Your debts are not gone even after you disappear from this planet. Here is what happens and don’t be surprised to find the reality.

Your banker might use your assets to pay off your debts. It might include the home you mortgaged for or car your had loan on or any of your stuff as they want most of their money back. When you die, your estate may be liable for a variety of debts, expenses, and taxes.

Your unpaid debt can eat into what you’ve left behind for your heirs, and in some cases, your family members could even wind up on the hook for your debt.

The secured debts like mortgages or auto loans, your estate can either pay off your debts in full or continue making installment payments, or the property can be sold or turned over to the lender to satisfy the debt. Secured debts are debts that give the creditor the right to take property pledged as security for the debt (collateral) if the debtor does not pay. Some common types of secured debts are car loans, business loans, and loans owed on real estate, like mortgages or deeds of trust.

For unsecured debt, like credit cards, bills, or personal loans, is typically just paid from the estate which is everything you own, including assets, bank accounts, real estate, etc. Unsecured debts are all debts not tied to specific property. Your executor must pay these debts and expenses out of property from your estate.

Also if you had a joint liability of your debts then the second person who had jointly signed your mortgage papers will have to continue to pay off your loans.

If you are a federal student and you have taken loan for studies or personal loans without a cosigner then you are discharged with proof of death or a death certificate.  This means your heirs won’t be responsible for your loans.

If  private student loan was cosigned, then that person will have to pay it off. Also some loans, like PLUS loans, although technically forgiven, could leave the parent who took it out with higher taxes.

Measure to prevent debt being passed over to your family

Debts and recoveries

What should you do to prevent the harassment of your family to pay off your debt when you are gone is a grave matter of concern.  You need to protect yourself and your family beforehand.

You should meet with an estate planning expert to get your affairs in order. Creating a plan of action for your outstanding debt is an important part of the estate planning process, as well as other end-of-life plans, like medical directives, wills, and trusts you might want to use to manage your assets when you pass away.

Also  reviewe your life insurance policy and make it up-to-date. Also don’t forget to designate beneficiaries. If your beneficiaries are assigned properly, some of your assets may bypass probate and be shielded from creditors. That means that anyone listed on your policy won’t be forced to give up their money for your debt.

How to write a will?

How to write a will

Never wait to write a will even if you are healthy person. Afterall we all have come here to leave one day and no one knows the exact time and date. Thinking of going and leaving this world any moment writing a will is a priority.

When you begin to make a will is to select the proper will form for your state and situation. You should select your last wills forms for the state where you reside most of the time. Simply chose the proper state and family situation for creating a will that applies to you. You will state your marital status and the names and birthdates of any children when you write your own will.

Name an executor, also referred to as a personal representative. This is a trusted person who is also allowed to be a beneficiary, but to avoid contesting a will, should not also be a witness.

List your assets and specific heirs of certain property. The do it yourself will form also includes a residuary clause which distributes after-acquired and unnamed property directly to the heir, rather than name a trustee when you write a will to manage the property.

If you’re making a will online and have minor children or have other reasons for creating a trust, you may also wish to name a guardian and create a testamentary trust when writing your own will. By creating a testamentary trust when making a will online, assets not to be distributed immediately or owned after making a will, or not specifically identified when writing your own will, can be dealt with according to instructions for trust property. The trustee named when creating a will can also act as a manager for property left to minor children, disabled, or spendthrift heirs, etc.

If you are leaving property in your will that is subject to a secured debt, you can state in your will whether the debt should pass along with the property. Because the property is usually worth more than any debt secured by it, a person who takes the property at your death but does not want to owe money can sell the property, pay off the debt and pocket the difference. However, if you think a particular beneficiary will need assistance with paying a debt owed on property, try to leave the necessary money or valuable assets to him or her as well.

You can leave instructions in your will about how to pay off unsecured debts.

Whether to leave instructions about debts on your will or not

You do not need to leave instructions about debts if any of the following are true:

  • Your debts and expenses are likely to be negligible—or to represent only a tiny fraction of a relatively large estate.
  • You are leaving all your property to your spouse or partner or specifying that it should be shared among a very few beneficiaries, without dividing it into specific bequests.
  • You understand and approve of how your state law deals with debts and expenses.
  • You need to plan more carefully if debts payable by your estate are likely to be large enough to cut significantly into bequests left to individuals and charitable institutions. Unless you plan carefully, the people whose bequests are used to pay debts and expenses may be the very people whom you would have preferred to take your property free and clear.
  • If you do not leave instructions about how to pay your obligations, your executor will pay them as required by the laws of your state. Some states leave it up to your executor to make good decisions about how to pay your debts and expenses. Other states require that debts and expenses be paid first out of property in your estate that does not pass under your will. In other states, your debts and expenses must first be paid out of liquid assets, such as bank accounts and securities, then from tangible personal property and, as a last resort, from real estate.

Write a will if you are under debt

If you decide to leave instructions in your will, you must choose which assets you executor should use to pay your obligations. It’s best to designate liquid assets over tangible assets that would have to be sold, and using insurance is also an option.

  • Liquid assets such as bank and deposit accounts, money market accounts, stocks and bonds—are a good choice because they are easily converted into cash at full value.
  • Tangible assets such as motor vehicles, planes, jewelry, stamp and coin collections, electronic items and musical instruments — must be sold to raise the necessary cash. Hurried sales seldom bring in anywhere near the full value, which means the net worth of your estate will also be reduced.
  • You can purchase a life insurance policy in an amount large enough to pay your anticipated debts and expenses and have the proceeds made payable to your estate. But be careful: this subjects the insurance proceeds to probate which could create a significant expense.

Note if the source you specify is insufficient to pay all the bills, your executor will still face the problem of which property to use to make up the difference. For this reason, it is often wise to list several resources and specify the order in which they should be used. Also, make sure that they are worth more than what is likely to be required.

Finally when you write a will it needs to be witnessed by at least two witnesses and notarized. The witnesses are attesting that you aren’t bonkers for making a will leaving everything to your Maltese, are aware of your property and heirs, and it is your own free choice. This is to protect against those thinking of contesting the will based on fraud, undue influence, or lack of testamentary capacity. Don’t forget to sign your will with date and time.

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