What happens to your debt after you die? How to protect your heirs

Key takeaways

  • Most debt will be settled by your estate after you die.

  • In many cases, the assets in your estate can be taken to pay off outstanding debt.

  • Federal student loans are among the only types of debt to be commonly forgiven at death.

Does debt die with you? Typically, if you die with unpaid debts, the responsibility for repaying them is passed to your estate rather than your loved ones. Debtors will likely go after your assets before contacting your beneficiaries.

The rules for settling a dead person’s debts can be complex. It is smart to fully understand how yours will be settled if you leave any behind. For more in-depth guidance, consult an estate planning attorney.

When you die, what happens to your debt?

If you have dependents or a spouse, you may be worried about what happens to your debt after you die. It’s a legitimate concern. In some situations, the surviving spouse might be responsible for debt left behind by the deceased person.

Depending on their relationship to you and your debt, certain individuals could inherit your debt, even if they are not related to you. These individuals are:

  • Spouses: Some states require community property — that is, property shared between spouses — to be put toward debt when a spouse dies. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Community property laws also apply in Alaska in certain circumstances.

  • Joint account holders: If you opened up a bank account with another person, that person would be responsible for any debts associated with that account.

  • Co-signers: If you take out a loan for a business, house or car with another person, they would still be responsible for any payments after you pass away.

  • Estate executors (in certain situations): Although executors are generally not personally liable for an estate’s debt, they can be held responsible if they are careless in their management of the estate’s assets or fail to pay the estate’s debts before allocating assets to the beneficiaries.

What types of debts can be inherited?

Some debts can be inherited. It depends on the debt type and which state you live in.

Medical bills

Each state has different rules on how medical debt is handled after you die. However, medical debt is usually the first debt to be settled by an estate. If you receive Medicaid after turning 55, your state will likely make a claim on your house to recoup any payments you received. Because there are a lot of nuances with medical debt, you should consult an attorney to understand how your debt will be settled when you die.

Car loans

A car loan is a type of secured debt. The car is collateral for the loan.

If your loan has a co-signer or co-borrower, they will be responsible for continuing to make payments on the loan. If not — or if the co-signer or co-borrower does not start making payments — the car will be repossessed.

Credit card debt

Credit card debt is unsecured debt, meaning you do not need to secure it with your house or car to open one. When you die, it is the responsibility of your estate to take care of any remaining debt. If your estate is not able to do so, the credit card company is out of luck.

The only time someone else is responsible for your credit card debt is if they are a joint account holder with you. Do not confuse this with an authorized user. Many parents make their children authorized users on their account, but this is not the same as a joint account holder.

A joint account holder opened the account with you and so is deemed to be just as responsible for the debt. This is why a joint account holder is expected to continue payments.

Mortgage

A mortgage is secured by the home it purchased. When you die, your estate will be used to pay off any remaining balance if you didn’t co-sign the loan.

If you leave the home to someone else, and your estate is not able to cover the remaining balance, that person will be responsible for all future payments. If there is a joint owner of the home and that person did not co-sign the mortgage with you, they will need to either sell the home and pay the balance off or continue payments to prevent the home from being foreclosed on.

Student loans

Federal student loans are generally forgiven upon the borrower’s death. Some private student loan companies forgive loans if the student dies. Check with your loan servicer if you are unsure.

Student loans are unsecured debt, which means that if your estate cannot pay off any remaining student loan payments, the lender is out of luck. As with every other type of debt on this list, if you co-signed the loan with someone else then the co-signer will need to take ownership of your debt. If you live in a community property state, your spouse is responsible for the debt.

Can items be taken to pay debts?

Creditors have access to most of your estate, with exceptions. Assets that may be used to pay off debt could include:

  • Real estate.

  • Vehicles.

  • Securities.

  • Jewelry

  • Antiques

  • Family heirlooms

Creditors cannot seize:

  • Life insurance benefits.

  • Retirement accounts.

  • Living or irrevocable trusts.

With so many assets that can be seized, it’s important to keep track of what you own and what you still owe. With careful planning, you can protect and preserve much of your estate to be handed down to your beneficiaries.

For example, you might use an irrevocable trust to protect your assets and potentially lower your estate taxes. Assets that are placed in these trusts no longer belong to you once the trust document is filed. Be aware, though, that the assets placed in these trusts cannot be moved back into your name once the trust is in place.

Protecting your heirs while you’re alive

If you are reading this article, you are still alive. That means you may be able to start taking steps to clear your debts before you pass away. Doing so means preserving more of your estate and fewer stresses for your heirs.

Try using our debt payoff calculator to build a customized plan for repaying your debts. You can start by paying the smallest debts first — the “snowball method.” Or you can focus on the highest-interest debts, which experts call the “avalanche method.”

If you cannot afford the monthly payments it would take to clear your debts entirely, here are a few options that might help you reduce your balances:

  • Debt consolidation: Debt consolidation involves combining multiple debts with a single personal loan. It may reduce your interest and monthly payment, depending on the loan you qualify for. It may also simplify things if you pass away before your debts are repaid. You will reduce the number of creditors claiming pieces of your estate.

  • Debt relief companies: These companies negotiate with creditors on your behalf in hopes of having your debts reduced or settled. Typically, only unsecured debts are eligible. Most state results could take two to four years. Working with these companies can damage your credit score. However, if you believe you may die soon and do not anticipate applying for additional credit before then, this may not be a concern.

Protecting your heirs with life insurance

Your life insurance policy may be your family’s biggest source of financial support. This is especially true if creditors seize most or all of your other assets.

Life insurance, much like other payable-on-death benefits, is safe from creditors. The money belongs to your beneficiaries. Even in the absence of sufficient assets in the estate to pay off debt, the life insurance benefit cannot be used for the purpose by creditors.

Your beneficiaries, however, can choose to use the money as they wish. The benefit may be used to pay off a mortgage or other loans if the benefit is big enough.

When searching for a life insurance policy, shopping around and getting quotes from multiple providers may be helpful. Doing this makes it easier to understand what coverage options are available, what the associated costs may be and what policy might work best for you.

Get quotes and weigh options from some of the best life insurance companies to find out which companies offer the most competitive rates and policies for you.

The bottom line

It’s natural to wonder what happens if you die with debt. In most cases, your surviving loved ones will not be burdened with your debts. Often it’s your estate that will handle paying off such debts.

But in some cases, a surviving spouse may be on the hook for some of the debt left behind. If you are concerned, familiarize yourself with the laws surrounding different types of debt. Consider protecting your heirs with a life insurance policy.

Frequently asked questions

  • What happens to an estate if a beneficiary dies before you do?A deceased person cannot inherit the assets in your estate. A beneficiary’s role is to receive the assets in your estate, and this role is key to an estate plan. In general, if your beneficiary passes on before you, any asset that is earmarked for them will be returned to your estate. However, you can typically name successor beneficiaries on assets or accounts, and/or specify beneficiary interests to be handled either per-stirpes or per-capita.It’s important to note that each state typically has estate laws that dictate how a situation such as this is handled. In many states, the estate returns to the grantor if the beneficiary passes first, even with an irrevocable trust in place. In some states, the assets will be passed to the beneficiary’s heirs or beneficiaries instead.That’s why it’s important to update your beneficiary list when necessary and know your state’s laws regarding estates.

  • Are children responsible for credit card debt?It depends. If the child is a joint account holder, then yes, they are responsible. If they are an authorized user, then no, they are not. If your child is the executor of your estate, then they must use your estate to pay off any remaining debt.Simply being your child does not make them financially responsible for your debt.

  • Are utility bills paid off after death?If you have utility bills that remain unpaid after your death, these debts will be paid off by your estate.

  • What debts are forgiven at death?Some debts may be forgiven upon death, depending on the circumstances. Student loans are commonly forgiven upon a borrower’s passing. Most kinds of consumer debt, including auto loans, credit cards, and personal loans, are leveraged against the estate, up to the full value of the estate. If the estate’s full value is less than the debt owed, remaining debt will often be discharged.Before making any decisions about your estate or debt, it’s always wise to speak with a qualified professional, such as a certified financial advisor or estate planning attorney.

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