The fallout from the mortgage crisis is affecting inheritors in unexpected ways. Heirs may find themselves owning a house worth less than its financed value. They also may find themselves facing credit and other types of debt still owed by their now deceased family member. Personal debt is generally thought of as disappearing with the death of the borrower. But the type of debt and state laws can change that.
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Co-signers or other backers may become liable for the debt. Without such guarantors, the debt gets written off and disappears. But co-signers become resources for banks to be made whole. Co-signing means you will be liable if the borrower is unable to pay. If you die and you have a solvent estate, your assets can be sold to satisfy that debt on which you co-signed.
The debt will be satisfied before your heirs receive any assets. Insurance policies, retirement benefits, and co-owned real estate are the exceptions. These assets by-pass the probate process and allow assets to go directly to beneficiaries. Different states treat these issues differently. Having trusts own assets can also protect them from creditors, depending on jurisdiction and how the trust is set up. Debt resolution is a component of estate planning which may be overlooked but which can have a devastating effect on heirs.