What happens to your debt after you die?

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Debt after death does exist, and unfortunately it doesn’t go anywhere until it’s taken care of.

Your estate is used to settle your debt when you die. Sometimes people you love may be responsible, and sometimes they may not be. In short, settling your debt is complicated. What happens to your debt after you die is important to know if you owe any money.

Who is responsible for your debt after you die?

If you have children or a surviving spouse, you may be worried about what will become of your debt after you die, which is a legitimate concern.

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 joint property to be put towards debt when a spouse dies. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
  • 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, he or she 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?

As stated, some debts can be inherited, but it depends on a few factors and what kind of debt it is.

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 place a lien 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, which, in this case, means the loan itself is secured by the actual car. If you are still making car payments when you die, unless someone chooses to continue making payments after your estate has cleared away your debts, the car will be repossessed.

Credit card debt

Credit card debt is unsecured debt, meaning you don’t 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. Don’t 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 as responsible for the debt. This is why a joint account holder is expected to continue payments.

Mortgage

As with auto loans, a mortgage is a debt type that is secured by the object it was used to purchase, which is the home itself. 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 continue payments to prevent the home from being repossessed.

Student loans

Student loans are unsecured debt, which means that if your estate can’t 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 (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), your spouse is responsible for the debt.

Some private student loans are immediately forgiven upon the debtor’s death (Sallie Mae and Wells Fargo, for example). If you are ill and have one of these student loan types, it may behoove you to not refinance it.

What can be taken to pay debts?

Creditors have access to most items listed in your estate, but there are a few things that they don’t have access to.

Here’s a quick breakdown:

Can be seized Cannot be seized
  • Home
  • Land
  • Cars
  • Boats
  • Valuable items
  • Financial securities
  • Life insurance benefits
  • Retirement accounts
  • Living Trusts
  • The great thing about life insurance, though, is that it can be used by your beneficiaries to pay large debts, such as the cost of a home. If you’re worried about where your family is going to stay after you’re gone, life insurance may be used to ensure they won’t get uprooted.

    Frequently asked questions

    What happens to an estate if a beneficiary dies before you do?

    Death benefits left to someone who is no longer living automatically go to the estate. This means the money may be taken by a creditor. It is for this reason that you should always make sure your beneficiary information is updated. If you’re worried about it, sit down with a lawyer and map out a full list of alternate beneficiaries.

    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 because he or she is your child does not make him or her financially responsible for your debt.

    Are utility bills paid off after death?

    As with most debts, if you have a large amount of unpaid utility bills upon your death, then those debts will be paid off by your estate.

    What debts are forgiven at death?

    There are some types of student loans that may be forgiven at your death. However, most debts must be settled by your estate.