It may be concerning to think about what will happen to your debts when you die. Perhaps you still have student loans from an undergraduate degree, or you are still paying off that once-shiny sports car. In New Jersey, your loved ones likely will not be responsible for many types of debts upon your death.
In general, after death, one’s debts will go to their estate. Their estate will pay off the debts with its assets, and if there are still debts of the deceased once the estate has been depleted, then those debts may be forgiven. We will explore the different types of debts and how they can be treated upon one’s death, according to New Jersey law.
Different Types of Debts
There are many different types of debt that one can have and those different types have different handling procedures upon death. Here, we will look at four kinds of debt:
Credit card debt will usually not be held against the heirs of an estate, but will be held against the estate itself. Creditors have nine months to stake a claim against the estate of a decedent. Once the claim is made, the creditors will begin to take assets from the estate to settle the debts. One instance where heirs themselves can be liable is when an heir co-signed on the credit card. If an heir co-signed on the card, then the creditor can seek repayment from that heir personally as well.
Many times, an estate will have the assets to pay off the credit card debt. If the estate has the assets to do so, then the estate is to pay off the credit card debt, shrinking the inheritance of the heirs.
Student loan debt, similar to credit card debt, will usually not be held against your loved ones. Unless a family member co-signed on the loan with you, then they will not be on the hook for the debt, and even if they do co-sign, death may sometimes pardon a student loan. Student loans, like credit cards, are unsecured debt. Therefore, they are last in line to be settled by an estate. Federal student loans are forgiven if the debtor dies, therefore no one would be held liable. Private student loans are not as cut-and-dry.
While a private lender may forgive the loan if the borrower dies, the debt may also become part of the estate and may be treated how the other debts are treated. It is generally up to the lender as to whether they will forgive the debt of a deceased borrower. Generally speaking, however, a family member would usually not be held liable for student loan debt of a decedent beyond paying the debt from the estate’s assets.
Medical bill debt is one of the few types of debts that may shift to a spouse upon one’s death. Even though medical bills are often unsecured loans, the doctrine of necessaries in New Jersey allows medical providers to seek repayment from a spouse. While medical bill debt cannot be enforced against other family members, a spouse may be on the hook for it.
Mortgage debt is another type of debt that a spouse or family member could be liable for. Assuming the mortgage is not paid off, then the surviving spouse, or anyone else who may have lived in the house with the decedent, would be responsible for paying the mortgage or risk facing foreclosure. Since the mortgage, a secured loan, is backed by the property itself, the family will likely not be shaken down for their own personal assets, but the house can be repossessed if the surviving family members do not continue paying the mortgage, and the estate can be further depleted if there is a deficiency.
A deficiency arises when a property is foreclosed upon, and the foreclosure sale price is less than the mortgage amount owed. For example, if the homeowner owes $500,000 on their mortgage, and the home sells in foreclosure for $470,000, there is a deficiency of $30,000. The mortgage lender has to seek legal action to recover this deficiency, meaning that in some cases they do not pursue the deficiency because it may not be worth the time and money the process requires. However, deficiency judgments may be brought against the estate of the deceased borrower if the lender chooses to go after the outstanding balance owed on the mortgage. There is a statute of limitations for how long the lender has to pursue a deficiency, but nevertheless this is another debt that the estate may have to pay.
Will Your Beneficiaries Have to Pay?
It is very rare that your heirs, other than a spouse, will be held liable for your debts upon death. Your debts will usually be settled by the estate. Creditors can take as much as they need from the estate to settle the debts. If there is still outstanding debt after the creditors have seized all the assets from the estate, then the estate will be insolvent and the creditors will often be left without full repayment. It is worth noting that any claims made against an estate can be challenged by the representative of the estate. If the representative of the estate believes a claim is incorrect, they should notify the claimant, who can bring this dispute to court.
In New Jersey, creditors have nine months after death to stake a claim against an estate. If the claim is not made within those nine months, the courts may dismiss the claim and leave the creditor empty-handed. This is why notice of death from the executor to the creditors is so important. If the executor does not notify the creditors of the decedent’s death, then the nine-month rule may be waived and the creditors may have a longer time to stake a claim.
If the claim is submitted within the nine months, and the claim is granted, the creditors will be able to receive assets from the estate to settle the debt. The order of priority for claiming debts goes as follows:
- Funeral expenses; then
- Taxes, medical bills, and judgments against the decedent; and finally
- Unsecured creditors
Generally speaking, the only time heirs will have to pay money for these debts is when the estate gets distributed prematurely. In this instance, a creditor can claim assets from the heir totaling up to their total inheritance from the estate. The creditors cannot seize more than what the heir inherited from the estate.
Will Your Spouse Be Held Liable?
There are many types of debt for which your spouse will be treated as any other heir. New Jersey is not a Community Property State, meaning that New Jersey does not deem that married couples legally share each other’s property and debt. This is good news. In New Jersey, debts such as credit card debts or student loans will not be held against the surviving spouse if the spouse did not co-sign on the debt. There are some exceptions, however.
The spouse will be liable for other debts, such as the mortgage of a home the spouse still lives in, or any other debts incurred by the decedent if the surviving spouse co-signed. The spouse can also be held liable for medical expenses or other necessary expenses incurred by the decedent during their marriage. While debts incurred by the decedent are oftentimes only held against the estate, there is something called the doctrine of necessaries. This doctrine allows spouses to be held liable for necessary expenses incurred while married.
Doctrine of Necessaries
The doctrine of necessaries in New Jersey allows creditors to seek repayment from the surviving spouse for necessary expenses incurred during the marriage. The usual example of this is medical bills that were incurred for necessary medical treatment to the deceased spouse, but this doctrine can also extend to credit card debt from charges “necessary” to support the household.
This doctrine allows medical providers or applicable creditors to file suit against a surviving spouse to compel them to pay the debt. Since the debt was incurred for something “necessary” to the decedent’s well-being, common law believes the spouse has an obligation to repay this debt. In doctrine of necessaries cases, the burden of proof is on the creditor, but if their claim succeeds then the surviving spouse will have to repay that debt.
No other heir nor family member will be responsible for these types of expenses since the common law goal of this doctrine was to oblige spouses to care for one another. If you are unsure whether the doctrine of necessaries applies to a particular debt, we recommend reaching out to an attorney.
Heirs other than spouses are rarely personally responsible for the debts of a decedent. Unless an heir co-signed debt with the decedent or lived in the decedent’s house and now wishes to continue paying the mortgage, then the heir will hardly ever incur the debt. Surviving spouses will incur the decedent’s debt more frequently than other heirs will, but the types of debt the surviving spouse can incur are very limited in New Jersey.
The thought of debt being passed onto relatives can be a stressful one. Luckily, New Jersey limits the impact of this issue by minimizing the types of debt that can be inherited and the people that can be burdened with it. If you are unsure whether your heirs or spouse will be left to pay off your debt, our experienced attorneys at Rosenblum Law can assess your situation and offer you sound legal advice.