Have you ever asked yourself, “What happens to debt when I die?” You might be surprised to find that the answer is not very straightforward.
Factors such as the type of debt you have, if your debt has co-signers, and even the state you live in can change the answer to this question.
Read on to learn the details so you can make sure the outcome is one you feel comfortable with, whether you’re looking at what happens to your student loans or other types of debt when you die.
What happens to debt when I die?
The answer to this questions depends, in part, on what type of debt you have. Dr. Sean Stein Smith, assistant professor at Lehman College and member of the AICPA Financial Literacy Commission, offers a list to help:
- Credit cards are not usually passed on to family members after death. However, co-signers could be responsible for repayment. Authorized users are rarely liable for any credit card debt of the decedent.
- Mortgages, if they go unpaid, will eventually be foreclosed on by the bank. If, however, you take over the payments on the mortgage promptly, then you can prevent this from happening.
- Auto loans work the same as mortgages. If you take over the car payments quickly, then the car shouldn’t be repossessed, regardless of whether or not you initially purchased the vehicle.
- Federal student loans are discharged if the borrower dies and will not be passed on to anyone else. As for private loans, it depends on whether or not they had a co-signer, as well as what the lender spells out in its terms and conditions.
According to Smith, your heirs won’t be responsible for your debt if your estate is solvent, which means there’s enough in it to cover the cost of all the debt. But if the estate is insolvent, then the responsibility will vary based on where you live, your relationship to your heirs, and their relationship to your debt.
Who’s responsible for your debt
- They co-signed on your debt
- If you live in any of the nine states with community property law (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin)
- You have a spouse and live in a state that requires them to repay certain types of debt, such as medical debt
- The person responsible for resolving your estate didn’t do so per your state’s probate laws
Your estate is responsible for your debt
Ultimately, your estate is responsible for your debt, explains estate and tax attorney Mitchell R. Miller. Secured debt is the priority, followed by unsecured debt such as credit cards and student loans.
So, who handles all of this? Mitchell says someone appointed as your estate’s executor, administrator, or trustee must notify your creditors and publish a legal notice of your death. From there, the creditors make their claims against your estate.
When your loved ones could hear from debt collectors
Although creditors must direct their collections efforts to your estate and not your family, that doesn’t mean your loved ones won’t hear from them. According to Mitchell, if your heirs receive funds or property from your estate before paying a creditor, the creditor can sue them.
What’s more, you might still hear from the creditors even if you don’t owe, says Leslie H. Tayne, financial attorney at Tayne Law Group and author of “Life & Debt.”
“Creditors will often try to guilt family members into paying, but there is no legal obligation to pay as long as the debt was solely in the decedent’s name.”
Your co-signers — and others — could be on the hook for your debt
If you die while you are in debt, your co-signer or guarantor is responsible for the debt. This is just another reason why co-signing on debt is such a huge responsibility.
Bankruptcy, tax, and estate planning attorney Randall R. Saxton talks more about this:
“If you have debt or assets that have a co-owner or co-signer, such as mortgage, home equity loans, joint credit cards, car loans, or student loans, the debt will pass to that co-owner or co-signer.”
The next person most likely to be held liable for debt is your spouse, unless you took on the debt before getting married. If you live in a community property state, your spouse could be liable anyway. And anyone inheriting assets with debt tied to it (such as a mortgage) will also inherit the debt.
How to prepare for the worst
If you’re worried about this, here’s what you can do to prepare and protect your loved ones.
The first step is to release co-signers from your debt. For example, private student loans offer co-signer release after you’ve made a set amount of consecutive, on-time, in-full payments (the number of payments required depends on the lender).
If you apply for co-signer release once your income, credit score, and payment history allow it, you can be sure others aren’t liable for your debt.
Also, if you have collateralized assets such as a home or car, make sure the person you’d leave the assets to wants them. If they do, prepare them with the knowledge of the debt on those assets. That way they won’t be blindsided by an inheritance tied to debt.
Finally, prepare a will. That way you can line up where you want your assets to go and who should manage the estate, while also informing them of that status ahead of time.
Handle this now so you can get on with your life
We made it through the death and debt discussion, although with some homework for you: Do what you can to put things in order now so you don’t have to dwell on this topic.
Once you do, then you can get back to living your life and enjoying your money. And you won’t have to worry about unnecessarily burdening your family should something happen to you unexpectedly.
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