The last thing your loved ones want to think about when they mourn your loss is money. Particularly debt.
But while it is unpleasant to dwell on a painful topic, it is important to consider all the financial consequences for your loved ones if something happens to you. This includes the legal status of any money you owe creditors.
So what really happens to your debt when you die? Is everything forgiven? Are your heirs responsible for its repayment? Or have your assets been liquidated to pay off debt?
The answer is actually all of the above, depending on the nature of the debt you had and your financial circumstances at the time of your death.
Immediate Consequences
Your collective assets such as cash, property and investments constitute what is called your property. This is similar to the concept of your net worth.
If you die, your estate will be administered by an executor named in your will or, if you have not appointed an executor, by a court-appointed executor.
Executor no need to use your own money to pay off any of your debts. Instead, the estate goes through a probate procedure, during which the executor will pay off all necessary debts using money from your estate or from the sale of assets from your estate.
Different types of debt are treated differently when you die. The contractor must make payments on the debt of the deceased on a priority basis in accordance with state law.
How are different types of debt treated?
Generally speaking, there is secured debt (mortgages, car loans, etc.) and unsecured debt (personal loans, most credit cards, etc.).
Secured debt is backed by assets that can be sold or seized to pay off the creditor. Unsecured debt does not have the same protection and can go unpaid if the debtor is broke, dead or alive.
Within the broad secured/unsecured dichotomy, there are a number of additional nuances of debt that are taken into account when the debtor dies.
medical debt
Your medical debt is not forgiven when you die. In fact, depending on your state’s laws, medical debt is usually the first debt your estate must pay off after you die. This means that the executor will have to use the assets from the estate to cover the medical debt before any other debt is paid off.
Mortgage debt
If you are a co-owner or heir of a mortgaged property, you will be responsible for keeping your mortgage payments on time if you want to keep the home. Your credit will not be affected if they do not continue to pay, but the bank will also have the right to foreclose on the property.
Alternatively, the heir may decide to liquidate the asset by selling the property. This will be a decision the heir must make after assessing whether they can afford to make mortgage payments.
Read more: Mortgage basics – everything you need to know
Credit card debt
Since credit card debt is usually unsecured, it does not need to be paid off if there is no money left in the inheritance to cover it.
If you were an authorized user of the deceased person’s credit card, you don’t need to worry about paying off the balance on that card.
However, if you were the owner of a joint account or the person who signed the credit card of the deceased, the balance of the card will become your responsibility. That is why it is extremely important to think twice and thrice before signing any loan products.
Auto loans
As with credit card debt, if you are a co-borrower on a car loan, you will be responsible for the remaining payments after the death of the car owner.
If you were the heir to the car rather than its co-borrower, you could sell the car to cover the remaining payments and avoid re-ownership. As with the house above, if you want to keep the car, you will need to maintain a current loan or the bank will take the car.
Read more: What happens if you are late with car payments?
student loan debt
Federal student loan debt is unusual in that it is forgiven when the borrower dies.
Private student loans are usually not forgiven and must be covered by the estate of the deceased. If the estate does not have enough money to cover the debt on a private student loan, it may remain unpaid, if there is no guarantor.
If there are guarantors, they will be responsible for repaying the loan.
What role do creditors play after your death?
Creditors must be formally notified when the person who owes them money has died. Creditors will then be given a fixed period of time, which varies from state to state, to file a claim against the property.
Creditors cannot touch most retirement accounts or life insurance payments (more on this in the next section). However, they may try to claim the following assets of the deceased debtor:
- Real estate.
- Cars.
- Securities.
- Jewelry.
- Other values (expensive art objects, motorcycles, boats, and so on).
Creditors or their collectors may legally notify a relative of the deceased once get the artist’s contact information. You may report creditors/debt collectors who are harassing you or holding you responsible for a deceased person’s debt without legal grounds. You can report collectors at CFPB online or call (855) 411-CFPB. You may also notify your state’s attorney general.
Protect loved ones from your debt
After paying off the debts, the remaining money from the inheritance will be distributed among the heirs according to the will. While your heirs generally don’t have to worry about taking on your debt, their expected inheritance can be changed if there aren’t enough assets in the estate to cover the debt.
But there are some precautions you can take to make your death and the transfer of your debt financially easier for your family.
Pay off your debts aggressively 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 property will be given to those you care about.
Plan your money to cut your expenses, increase your income, and strive to make more than the minimum payments for what you owe.
Read more: How to get out of debt on your own – a do-it-yourself guide
Create a Will
Your loved ones may have different opinions about how to distribute your assets after your death. Drawing up a clear will and appointment of an executor will minimize confusion, conflicts and legal costs in the probate process.
You can also use an irrevocable trust to protect your assets and possibly reduce the tax burden on your property.
Read more: Who needs a will?
Be Careful With Debt Sharing
If you had no money or valuable assets at the time of your death, your debts are usually not paid. Until the debt was shared (mortgage, car loan, etc.) or had a guarantor.
If you share a mortgage, car loan, or credit card with someone, then they will be responsible for the remaining payments if you die. Or, if someone acted as surety or surety for your debt, then they will generally be legally liable for it after your death. This applies to medical debt, personal loans and credit cards.
Before asking someone to sign or guarantee your debt, always consider how it will affect them in the worst case scenario, such as if you die before the debt is paid off in full. Is your guarantor or guarantor financially strong enough to take on your obligations without seriously impacting your quality of life? Do you have other financial safety nets that can help your co-borrower if you can no longer make payments?
Get a life insurance policy
A life insurance policy is designed to provide financial assistance to your loved ones when you die. How will life insurance protect your loved ones when it comes to your debts?
- final expenses. Life insurance can cover your funeral expenses and other final expenses, which can prevent your family from taking on additional debt.
- Substantial payout. An insurance policy will bring financial benefits to your family. If the life insurance benefit is high enough, the family can use the money to pay off the mortgage or any other loans they are involved in.
- Released from creditors. In most cases, you don’t have to worry about collectors coming to collect your life insurance.
You can learn more by reading our introductory guide to how life insurance works.
Final Thoughts
While this may be a worrying topic for some, it is important that you take some time to work through the discomfort, think about your current debt burden, and think about what will happen to that debt when you die.
Your family may not necessarily inherit your debt, but it can be confusing if assets (such as a house or car) need to be sold to pay off your creditors. You will want to take some precautions while you are still alive to protect your loved ones in the event of your untimely death. They will be grateful to you.