What happens to your debts after you die?

Death and debt: Both can be uncomfortable subjects to discuss, but what happens to your financial obligations after you pass away is one uncomfortable conversation worth having with your loved ones. Survivors of the deceased can often fall prey to some common traps when it comes to "inheriting" debt, and it's imperative they know their rights before it's too late.

Carole Brody Fleet (pictured at right) almost fell victim to a common heavy-handed tactic used by lenders against grieving families. Fleet, who later wrote a self-help book about her experience as a widow, tells WalletPop she was contacted roughly one month after her husband passed away in 2000 by a law office representing the couple's long-time credit union.

"I was never contacted personally by the credit union, many employees of which were at his funeral," Brody says. Instead, she received a letter informing her of an old account - predating her marriage - on which her husband still owed money. The credit union was threatening to take her to collections. Brody, who had a background as a paralegal, saw this empty threat for what it was and didn't pay a dime. "I was shocked and outraged," Brody says.

As well she should have. By and large, your loved ones' debts are not your debts. Debt isn't passed along like the family photo album -- it's simply not legal. If a parent, sibling or other loved one dies owing money, that doesn't mean you owe money, no matter what the lender tells you. Even spouses have immunity in most states (the exception is in the handful of states known as "community property" states, a list of which you'll find at the link).

"A lot of times, one of two things happens: A creditor doesn't know the law, or a creditor's trying to shake money out of people," says Robert Baker, director of education at nonprofit Housing and Credit Counseling Inc. in Topeka, Kan. "Some are more aggressive than others, and some will say anything to get survivors to send money."

"I've had clients tell me creditors have made bullying, threatening statements like you're obligated to pay this bill,'" says Gary Gilgen, a financial adviser with wealth-management company Rehmann in Troy, Mich. "Or they try to guilt-trip grieving families by saying, 'You should take on this responsibility." Adding insult to injury, many creditors will make family members provide a wide array of documentation. One of Brody's late husband's creditors demanded a copy of the program from his funeral before they would believe he had passed away.

What You Should Know

There is one important distinction to know concerning "inherited" debts: The law does say that if a person dies with assets such as a bank account, house, car or stock portfolio, those assets must be used to pay off any outstanding debts before the estate can be divided among the deceased's next of kin. In other words, if Grandma left you both her house and a pile of credit card bills, you have to make good on those bills if you want to keep the house, or you can sell it to pay her debts. Unfortunately, creditors aren't shy about bellying up to claim their share of a dead person's nest egg, Gilgen says.

The rules also change if you're linked to someone financially via a debt and one of you dies. The Wall Street Journal recently wrote about one family who went through a doubly painful experience when they lost their college-age son. Soon after their son's death, creditors started badgering them to repay the private student loans they had co-signed with him. If you have a joint credit card, car loan or apartment lease, even if you consider yourself "just" a co-signer, you're still responsible for that debt if the other party dies. The exception to this is authorized users on credit cards; while co-account holders are liable for each others' debts, authorized users are not, although you may encounter card issuers trying to tell you otherwise. Also, as the Journal article points out, federal student loans are more lenient than their private counterparts when it comes to the death of a loan holder.

One other thing to watch out for: scam artists. Unfortunately, says Gilgen, scam artists often target grieving families, since people who've lost a loved one might be too exhausted or distraught to exercise caution. If a loved one dies and someone contacts you claiming to represent a creditor and demanding money, our experts have a few concrete pieces of advice.

First, don't send any money, at least not unless you've established beyond a shadow of a doubt that you're responsible for the debt. Next, don't assume the creditor is telling the whole truth. Ask to see in writing what the original debt was for, what party or company holds the debt, and what the exact amount is. Having an estate lawyer on your side is always a good idea, since they can go to bat on your behalf and deal with the more aggressive creditors.

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