Who Inherits the Mortgage & the Credit Card Debt?

Family members typically aren’t responsible for debt held solely in the name of a deceased relative, but creditors still have certain rights to payment. Whether the creditors get paid ultimately depends on the value of the assets owned by the deceased.

Moreover, if you co-signed a loan with the deceased, you are responsible for all of the remaining payments on the loan. Similarly, if you agreed to personally guarantee payment of the debtor’s loan, you also are obligated to repay the loan.

Mortgage debt on a home is typically inherited along with the home by the beneficiary. In Minnesota, the general directive in the Will to “pay all debts” out of the estate’s assets doesn’t apply to specific gifts such as a house subject to a mortgage.

A home is a secured debt – meaning that the lender can take back the house if payments aren’t made.  Loans for cars and boats are also secured debt.

If the house or car or boat is worth less than the remaining debt still owed on it, the beneficiary can refuse to accept it, and the personal representative of the deceased’s estate may decide to let the lender repossess the property.

That may sound like an attractive option given the state of the housing market in recent years. However, the lender can then file a claim against the estate’s other assets for the monetary difference between the debt owed and the residual value of the returned house, car or boat, as the case may be.

At least the beneficiary’s credit rating isn’t impacted by the return of the house because the abandonment is done by the personal representative on behalf of the estate, not the beneficiary. And the beneficiary isn’t left with a large mortgage debt that he or she does not wish to pay.

Credit card debt is different than a home mortgage because credit card debt is general, unsecured debt. As such, the credit card company stands at the end of a line of creditors, and is only paid if there are assets left after the other creditors are paid.  Minnesota specifies the priority for the payment of creditor claims, as follows:

1. The costs and expenses of administering the estate, which includes such things as  legal fees, court fees and fees for publishing notices to creditors in legal newspapers.
2. Reasonable funeral expenses.
3. Federal taxes and certain other debts having preference under federal law.
4. Reasonable and necessary medical, hospital or nursing home expenses of the last illness, including reimbursement for Medical Assistance. (Medical Assistance is Minnesota’s name for Medicaid, which is fund partially by the federal government and partially by Minnesota.)
5. Reasonable and necessary medical, hospital and nursing home expenses incurred in the year before death.
6.   State taxes and certain other state claims having preference under Minnesota law.
7.   All other claims.

Minnesota allows a few exceptions to the assets that are subject to creditors’ claims. There are three key exemptions when the deceased is survived by a spouse, dependent children or minor children. They are as follows:

1. The family home except for those claims involving the mortgage, mechanics liens, claims for state hospital care and claims for recovery of Medical Assistance payments made on behalf of the deceased.
2. Personal property up to $10,000 in value, plus one automobile of any value.
3. A family allowance up to $1,500 per month for 12 months if the estate in insolvent estate, or up to 18 months if the estate is solvent.

Generally, only those assets subject to probate are subject to creditor claims in Minnesota. However, if the probate assets are insufficient to cover all creditor claims, other assets may be used to pay creditors.

Probate assets are those assets of the deceased that go through the probate court process. Many assets don’t go through probate, including life insurance proceeds, assets held in living trusts, jointly held property, and retirement plans (unless “estate” is listed as the beneficiary).

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Disclaimer: This Blog is for informational purposes only and is not to be construed as legal advice. If you have questions, please seek the advice of an attorney. An attorney-client relationship is not formed by reading this Blog. If you are interested in Wittenburg Law’s representation of you, you must contact Wittenburg Law for a determination of whether your matter is one for which Wittenburg Law is willing and able to accept representation of you.

Bonnie Wittenburg, Wittenburg Law Office, PLLC, 601 Carlson Parkway, Suite 1050, Minnetonka, MN 55305  952-649-9771  www.bwittenburglaw.com  bonnie@bwittenburglaw.com