What happens to your debt after you die?

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Death signifies the end for most earthly connections but not quite so for debt. If you owe money and leave it unpaid while you are alive, it will continue to snowball and need to be taken care of even long after you die. Debt could be in any form: a personal loan, a mortgage or an unsecured credit card liability, among others. And although they may vary in amount, they all have to be paid off with the accumulated interest within a certain time.

When you are gone, the responsibility for settling the debt goes to someone else. Typically, a deceased person’s will is consulted to find out how they intended the debt to be settled. In the absence of a will, your estate – or the total of all your possessions and assets – is used to pay off debt. In many cases, a member of your family may be responsible for your debt settlement but often people unrelated to you could also be tasked with the process. If you have debt, it is a wise move to have a thorough knowledge of how it is going to be settled once you are gone.

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 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

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 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 (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or 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 do not have access to.

Possessions that can be seized by creditors for debt settlement include property, such as a house or land, any kind of vehicles, from cars to boats, financial securities such as savings, stocks and bonds, and other valuables like jewelry, antiques and family heirlooms.

What cannot be taken to pay off debt includes life insurance benefits, retirement accounts and living trusts.

Barring these, everything else can be taken away from your loved ones to settle the debt and there is not much you can do about it. When estate planning, many people with debt choose to create an irrevocable trust, which is an alternative to a will and cannot be changed or revoked by anyone once created. Anything included in this trust is safe from creditors, but remember that you cannot break it or use the assets for money if you change your mind later.

Protecting your heirs with life insurance

In the event of your sudden demise, your life insurance policy could become your family’s biggest source of financial support, especially when everything else is taken away by creditors. Life insurance, much like other payable-on-death benefits, is safe from creditors and 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, and if the benefit is big enough, it may be used to pay off a mortgage or other loans. The money from life insurance also ensures that your family can continue living in the house after your demise and carry on with normal life.

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 are 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.

Written by
Cynthia Widmayer
Insurance Contributor
Cynthia Widmayer has over two years of experience as an insurance and personal finance writer. She covers home, car and life insurance products for Bankrate, the Simple Dollar, and Coverage.com, among others.