The last thing your loved ones will want to think about when grieving your loss is money. Particularly debt.
But while it’s unpleasant to dwell on a morbid topic, it’s important to consider all the financial implications for your loved ones if something were to happen to you. That includes the legal status of any money you owe to creditors.
So what actually happens to your debt when you pass away? Is it all forgiven? Are your inheritors responsible for repaying it? Or are your assets liquidated to pay debt off?
The answer is actually all of the above, depending on the nature of the debt that you held and your financial circumstances at the time of your demise.
The Immediate Aftermath
Your collective assets — like cash, property, and investments — make up what is referred to as your estate. It’s similar to the concept of your net worth.
If you die, your estate is managed by an executor designated in your will, or, in the event that you did not designate an executor, by a court-appointed executor.
The executor does not have to use their own money to repay any of your debts. The estate instead goes through a probate process in which the executor will repay any necessary debts using money from your estate, or from the sale of your estate’s assets.
Different types of debt are treated differently when you die. The executor has to make payments on the deceased’s debt based on priority according to state laws.
How Are Different Types of Debt Treated?
Broadly speaking, there’s secured debt (mortgage, auto loans, etc.) and unsecured debt (personal loans, most credit cards, etc.).
Secured debt is covered by assets that can be sold or repossessed in order to pay back the lender. Unsecured debt doesn’t have that same protection and may go unpaid if the debtor is broke, dead or alive.
Within the broad secured/unsecured dichotomy there are a number of further debt nuances that are considered when a debtor dies.
Your medical debt is not forgiven upon your passing. In fact, medical debt is usually the first debt that needs to be settled by the estate when you die, depending on your state’s laws. This means that the executor will have to use assets from the estate to cover the medical debt before any other debt is repaid.
If you are a co-owner of a mortgaged property or its inheritor you will be responsible for keeping up with mortgage payments if you want to keep the house. Your credit will not be affected if they don’t keep up the payments but the bank will also have the right to foreclose on the property.
The inheritor might alternatively choose to liquidate the asset by selling the property. This will be a decision that the inheritor has to make after assessing whether or not they can afford to make the mortgage payments.
Credit Card Debt
Since credit card debt is typically unsecured, it doesn’t have to be paid off if there’s no money left in the estate to cover it.
If you were an authorized user on the credit card of someone who passed away, you don’t have to worry about repaying that card’s balance.
However, if you were a joint account holder or co-signer for the deceased’s credit card, then the card balance will become your responsibility. This is why it’s imperative that you think twice and thrice before co-signing on any credit products.
As with credit card debt, if you’re a co-signer on a car loan then you’re going to be responsible for its remaining payments after the vehicle’s owner dies.
If you were an inheritor of a car and not its co-signer, then you could sell the car to cover the remaining payments and avoid repossession. Just like with the house above, if you want to keep the car you’ll need to keep the loan current or the bank will repossess the car.
Student Loan Debt
Federal student loan debt is unusual in that it is forgiven upon the borrower’s death.
Private student loans are typically not forgiven and need to be covered by the deceased’s estate. If there’s not enough money in the estate to cover the private student loan debt, it may end up going unpaid, unless there’s a co-signer.
If there is a co-signer, they will be responsible for paying the loan.
What Role Do Creditors Play After You Die?
Creditors need to be legally notified when the person owing them money passes away. The creditors will then be given a fixed amount of time, which varies from state to state, to file a claim against the estate.
Creditors can’t touch most retirement accounts or any life insurance benefits (more on that in the next section). They can, however, try to claim the following assets of a deceased debtor:
- Real estate.
- Other valuables (expensive art, motorcycles, boats, and so on).
Creditors or their debt collectors can legally notify a relative of the deceased once to obtain the contact information of the executor. You can report creditors/debt collectors who are harassing you or holding you responsible for the deceased’s debt without legal basis. You can report the debt collectors to the CFPB online or by calling (855) 411-CFPB. You can also notify your state’s attorney general.
Protecting Loved Ones from Your Debt
After debts are repaid, the remaining money from the estate will be distributed to the inheritors according to the will. Though your inheritors typically don’t have to worry about taking on your debt, their anticipated inheritance may be altered if there are not enough assets in the estate to cover the debt.
But there are some precautions you can take to make your passing on, and the passing on of your debt, financially easier on your family.
Aggressively Repay Debt While You’re Alive
The easiest way to minimize your loved ones’ debt-related stress when you die is to minimize the amount of debt you carry while you’re alive. The less debt you have, the more of your estate will be passed on to those you care about.
Create a Will
Your loved ones may have differing opinions of how to distribute your assets when you pass. Creating a clear will and naming an executor will minimize confusion, conflict, and legal expense in the probate process.
You can also use an irrevocable trust to protect your assets and possibly reduce the tax burden for your estate.
Read more: Who Needs a Will?
Be Cautious About Sharing Debt
If you did not hold any money or assets of value at the time of your death, your debts typically will not be paid. Unless the debt was shared (mortgage, car loan, etc.) or had a co-signer.
If you share a mortgage, a car loan, or a credit card with someone, then they’ll be responsible for its remaining payments if you pass away. Or if someone served as a co-signer or guarantor for your debt, then they’ll typically be held legally responsible for it after you die. This applies to medical debt, personal loans, and credit cards.
Before asking someone to co-sign or guarantee your debt, always consider how they would be affected in worst-case scenarios, like you dying before the debt is fully repaid. Is your co-signer or guarantor financially comfortable enough to assume your liabilities without taking a major hit to their quality of life? Do you have other financial safety nets in place that can help your co-signer out if you are no longer around to make your payments?
Take Out a Life Insurance Policy
A life insurance policy is designed to financially assist your loved ones when you pass. How will life insurance protect your loved ones when it comes to your debts?
- Final expenses. Life insurance can cover your funeral costs and other final expenses, which can prevent your family from taking on additional debt.
- Substantial payout. The insurance policy will pay your family a financial benefit. If the life insurance benefit is large enough, the family can use the money to pay off a mortgage or any other loans they are party to.
- Exempt from creditors. In most cases, you don’t have to worry about debt collectors coming for a life insurance payout.
You can learn more by reading our introductory guide to how life insurance works.
While this can be an unsettling subject for some, it’s important that you take some time to bear the discomfort, consider your current debt load, and reflect on what will happen to that debt when you die.
Your family may not necessarily inherit your debt, but there could be a confusing situation if assets (like a home or car) need to be sold to pay off your creditors. You’re going to want to take some precautionary steps while you’re still alive to help protect your loved ones in the event of your untimely passing. They’ll be thankful you did.