What happens to debt when you die? While no one wants to think about what happens after death for their loved ones, the fact is that debt after death is common for many people. So who is responsible for debt after death? And how will it affect those you love?
Debt after death is complicated. And state laws all look different based on what does and does not count when it comes to paying off debt.
In some cases, yes, your debt can be inherited. But not all debts pass on to someone else after you die. In fact, most debt will depend on the state you live in and the exact debt that you have. However, here are a few debts to look out for.
Medical Debt After Death
While this will depend on your state and your insurance/estate, this may be a debt that your spouse will be on the hook for. However, luckily, unless your dependents co-signed on any loans for medial care, they won’t be responsible for your debt.
Do you think you’ll have medical debt when you pass away? You should consult with an attorney to know your best options for debt settlement.
Car Loans & Secured Debts After Death
Most secured debts won’t affect those in your life, unless they were a co-signer. However, if you were still making payments on your car (or any other secured debt), your estate will need to clear the debt. If it doesn’t, the debt will be repossessed or taken back. But, if your spouse, or dependent, is willing to take on those debts and keep the items, they will have that opportunity.
The same goes for your mortgage. If you leave the home to your spouse or dependents, and your estate doesn’t cover the balance, they will be responsible for the payments. This is why you’ll often see homes go up for sale after a death. The estate didn’t have enough money to pay off the mortgage, and the kids may not have the funds either. So, the house goes up for sale to pay off the bank loan.
Credit Cards & Student Loans After Death
Unlike car loans, credit card debt is unsecured. So when you die, if your estate can’t pay off the debt, the credit card can’t go after your loved ones for it. However, if you have joint accounts, whoever you share the card with will be responsible of the remaining debt.
Keep in mind that a joint account is not the same as an authorized user. If your children are on your account as authorized users, they are not responsible for your debt if you pass away.
Just like credit card debt, student loans are also unsecured. So if your estate can’t pay off your remaining student loan debt, the debt holder is out of luck. However, if you live in a community property state, (which includes Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) and are married, your spouse will be responsible for the debt. So if you were asking, “Am I responsible for my spouse’s debt after death?”, in situations like these, yes you are.
Who Can Inherit Debt After Death?
Essentially, if there is a debt that must be paid after your death (like co-signed loans), the debt will go to whoever co-signed with you. In community property states, your surviving spouse may be on the hook to pay.
But your children and other dependents will not be responsible for your debt when you pass away. They’re only responsible if they were a co-signer. Just keep in mind that if you’re leaving property to them, that they will have to make payments if you still owe money when you die. If the property is paid off, they won’t have to worry about that.
Luckily, assets like trusts, life insurance, and retirement accounts aren’t usually used to pay off debts. These will go to your beneficiaries. However, your spouse or family can use life insurance money to pay off debts should they want to.
There is one thing to keep in mind about life insurance, and why you should keep it up to date. If you pass away and the beneficiaries on your policy are no longer alive, the money may be passed to your estate. That would mean that creditors could then request payment for your debts.
As far as debt collectors potentially harassing your family after you pass away, that is against the Federal Trade Commission rules. The only thing a debt collector can do is contact the deceased person’s relatives (including a spouse) or executor to inform them of the debt. However, if the people aren’t responsible for paying for it, a debt collector can’t mislead them. And, your family and spouse would have the right to tell a debt collector to stop contacting them if they weren’t responsible for the debt.
How To Handle Debt After Death
There are a few ways to protect your loved ones from owing debt after you die. For one, a prenup can keep your spouse from owing money. This includes medical debts and credit card debts that don’t have their name on them. A prenup also covers them in community property states.
Also, talking to an attorney can help you see what your family may owe should you pass away. It will also help you come up with a solution that better protects them.
The best action to take is to try to pay off your debts before you pass away, but that isn’t always possible. Debts like mortgages and student loans can take years to pay off, and sometimes life just happens. So instead, sign up for life insurance and make sure to have a will in place. This is the number one way to protect those you love and make sure that they are taken care of.
Debt After Death Doesn’t Have To Ruin Lives
We never know when we’re going to die. But, we can at least prepare and try to do what we can. No one wants to leave their family in a terrible position. That is why there are laws and regulations in place. These make sure that your family isn’t taken advantage of should you pass away with debt.
Are you prepared? Do you know what will happen to your debt after death? I sure hope so!!
AUTHOR Kimberly Studdard
Kim Studdard is a strategy consultant, product launch expert, and mastermind behind the www.theentrepremomer.com. When she isn't spending time with her daughter and husband, or crying over This Is Us, you'll find her teaching other mompreneurs how to scale their business without scaling their workload.