What happens to debt when you die?

You might assume that when you die your debt dies with you. Unfortunately that’s not always the case and there’s a lot you need to know so you can protect your family.

Estates and debt

If you’re wondering what happens to debt when you die, it’s important to understand how all of your financial affairs are handed after your death. When a person dies, all of the assets and debts in their sole name are part of their estate. If you have a will, you have chosen an executor. If you die without a will an administrator is appointed by the court. Your executor or administrator uses your existing assets to pay the debt left in your name. Creditors are always paid before your beneficiaries are. Once your debts are paid, whatever assets are left will be distributed to your heirs. The debts do not pass to your heirs. If you have more debt after death than assets, there will be nothing left for your heirs. The debts are then a loss taken by the creditors.

What happens to credit card debt when you die

Worrying about what happens to credit card debt when someone dies is a common concern. Credit card debt after death is treated the same as any other debt. If the debt is in your name alone, it is paid through your estate. However if you have credit card debt when you die and the account has a co-signor or joint owner, that person becomes responsible for the debt. Authorized users are not responsible for your credit card debt upon death.

Mortgages

A mortgage in your sole name is handled like any other debt and death. It is paid off through your estate. If your spouse co-signed the mortgage, he or she is legally responsible for the debt when you die. If you have a surviving spouse when you die who is not a co-signor, he or she is entitled to take over the mortgage (even if it is in your name) without having to immediately pay the full balance. The spouse will need to qualify for the mortgage and continue making payments. A home equity line of credit must be refinanced by the surviving spouse, unless the spouse co-signed the loan, in which case he or she is responsible for the loan.

Passing property with debt

If you leave a piece of property to someone that has a debt attached to it (like a home mortgage or a car loan), the debt will pass with the property. It is the responsibility of the new owner to refinance the debt, or sell the property to satisfy the loan. If you pass a piece of property that is worth less than the debt (such as a home that is “under water”), the debt will be settled by your estate. If there are not enough other assets to cover it, the property will be sold to cover the debt.

Community property and debt

10 states have community property laws (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In Alaska couples must opt-in to have communal property). In these states, any assets or debts acquired during the marriage belongs to the other spouse as well. So if you reside in one of these states, die, and leave debt in your name alone, your spouse is responsible for this debt.

Student loans

Some student loans, such as federal Perkins and Stafford loans, provide loan forgiveness if the student dies before paying them back. Thus the loan is not deducted against the estate. There is also forgiveness of federal PLUS loans (loans taken by parents) if the student dies.

Protecting assets from debt

Not all of your assets can be accessed by your creditors after your death. Accounts that have beneficiaries, like IRAs, 401(k)s, life insurance, pension plans, and brokerage accounts are not accessible to creditors. If you place assets in an irrevocable trust they are also immune to creditors.

Protections for families

Although it is very clear your family is not responsible for debt in your name alone (with the exception of community property states), this does not stop some lenders from sending notices to family or making debt collection calls after you pass away. Family members should not be tricked by these tactics. If the demands continue, an attorney can step in and put a stop to it.

Understanding your rights and your family’s rights about debt after your death can help you plan and take steps to protect yourselves.

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