Many people feel a moral obligation to pay all of their own debts before they die, or to make sure that they provide the means to do so, because they do not want to leave behind unfinished business. It is also a way for some people not to burden their loved ones after they are gone. If a person does not do this, it can leave some more work for his family members and the executor of his estate in settling his affairs.
Your loved one's estate is responsible for paying off her debts after she dies. Financial counselor and radio talk-show host Dave Ramsey often says, "What you own stands good for what you owe." The executor of her estate will take an inventory of all available assets, as well as what she owed in debts, and determine how to pay them off. If she does not have enough money to pay off all of the debts, the executor will work with the courts to determine that available assets are divided among her creditors, in a fair and legal way. Once all of the debts are paid off, any remaining assets will be distributed to her heirs.
If you are a co-borrower on a loan with someone who dies, you are responsible for paying the entire balance of the loan. Being a co-signer means that you are jointly and severally liable, meaning that each of you is responsible for the entire balance of the debt. The executor of the estate should still include this loan in the estate. If a balance remains after settling the estate, you will need to pay it. You also might wish to make the payments on the loan pending that settlement to protect your credit rating.
Finance companies and creditors may contact relatives of the person who died, and they may try to collect money due on loans to the deceased relative. Although it is legal for companies to contact people in this manner, you do not have a personal responsibility to pay these debts. Some people choose to pay them as part of a moral obligation to their relative, but it is not legally enforceable.
If you are the beneficiary of a life insurance policy from a person and you collect the benefit after his death, you do not have to use the proceeds of that life insurance policy to pay his debt. The life insurance death benefit becomes your money to use as you wish. If a deceased does not name a life insurance beneficiary, or if he makes his estate the beneficiary, the money is part of his estate, and it will be used to settle any debts that he has.
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