While we’re living, we wish that our debt would just go away and die. But when you die, it’s one of the few things that regrettably stays alive.
Once you’ve crossed over into the great beyond, your creditors may offer your family their deepest condolences, but it doesn’t change one important thing: they still want to be paid. So who handles the overdue bills?
It depends on the circumstances. The future of your debt after you’re gone, and knowing if your loved ones are responsible, all depends on the type of debt you have, how much you owe, and the amount of money you’ve left behind.
Curiously morbid as all this sounds, even the most debt-free of folks should consider these hypotheticals if you don’t want to leave your survivors or next of kin the heavy burden of -- pardon the pun -- burying your debt themselves.
Here’s how to plan in advance while you’re still above ground.
Dealing with debt after you’re dead
When you die, the sum of your assets (money, investments, property, your house, etc.) becomes your estate. If you drafted a will, you’ll have appointed someone to be your executor: the person who handles the process of resolving your financial matters, including the payoff of any debt (known in legalese as probate). Absent a will or final testament, the state takes over your affairs.
Here’s the good news: Once your estate has been completely exhausted, your creditors have very little recourse if there’s any debt remaining; technically, this means a portion of your debt does actually die off with you. The bad news is that you still need to pay them in the meantime.
When your survivors are responsible for the debt
Family members who have cosigned on any accounts belonging to you will become responsible if you die or are somehow unable to pay off your debt. It doesn’t matter if it’s a home, auto or student loan, credit card or some other borrowed money; cosigners, by law, are equally responsible for your debt.
Some exceptions and caveats to your creditors collecting what’s due may apply according to the type of loan(s) you may have. For instance:
If the loan has a co-owner, or if a family member inherits the property, they can choose to take over the mortgage payments with no issues over the transition. However, lenders may apply a bit more pressure on the person who assumes the mortgage if it’s a line of credit attached to the value of the home, like a home equity loan or home equity line of credit, forcing them to pay up.
If they can’t, or don’t have credit strong enough to refinance the loan to better manage the payments, they may be forced to relinquish the property.
Auto loan debt
Car loans are similar to mortgages: if a family member, relative or friend is willing to pick up the payments where you left off, there’s no need for creditors or collectors to get themselves involved. If not, the lender reserves the right to repossess the vehicle.
Here’s where a deceased’s debt differs. If there’s not enough money in one’s estate to cover the entire outstanding balance, creditors and card providers are generally out of luck if they try to collect, regardless of the amount racking up interest on your account. (Credit card debt is an unsecured debt not attached to your estate.)
But, as with other debt, if you’re a cosigner on a deceased relative’s credit card, you’re liable for any unpaid balance. Any authorized users you’ve allowed on your credit card account won’t owe any money if there’s an outstanding balance following the death of the account holder. Authorized users are not cosigners, so they’re not responsible for paying off debt.
However, authorized users should be mindful that if the debt isn’t paid off, their credit score could take a hit, since they’ve been involved with using the account.
Federal student loan debt is completely discharged in death, so one’s estate or relatives won’t owe the U.S. Department of Education a dime. Private student loans are another story; like a credit card or mortgage loan, most (but not all) non-federal lenders are allowed to pursue payment from one’s estate.
With student loans, the same rules apply for cosigners. Since they’re considered the next party in line responsible for overdue debt, they’re on the hook for the money if the person they cosigned for has passed away.
Can your debt die off?
The community’s property
Forget about that iron-clad prenup; 10 states operate under community property laws, which makes one’s spouse responsible for the property/debt of another spouse, even if it was accumulated after they were married. Community property states include Alaska (couples must choose to opt in), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Zero money in the estate?
For the most part, if there were zero cosigners attached to a loan, or a widow or widower of a spouse in debt didn’t live in a community property state, there’s not much creditors can do to reclaim unpaid debt if there’s no money left in an estate. In these cases, debts are usually written off and forgiven.
But debt collectors are a persistent bunch, and despite everything we’ve mentioned here so far, that usually won’t prevent collection agencies from at least attempting to persuade a person’s survivors into paying off an outstanding debt balance, even if they’re not legally responsible for it. If you’re a family member or friend who didn’t cosign, but you’ve been getting harangued and harassed by debt collectors, write a certified letter to the organization(s) expressing your desire to be left alone.
Failing that, don’t hesitate to contact an attorney or the police to intervene.
An exception to estate rules
Some estate assets are (usually) exempt from being used in probate dealings.
Beneficiary accounts such as IRAs, 401(k)s, employer-backed retirement accounts, life insurance plans, etc., are not counted as part of an estate, so they’re protected from being seized for debt.
(We use the operative word "usually" because some exceptions are made; because rules vary by state, some accounts may not be protected.)
Getting your house in order
Even if you intend to be around another 80 or 90 years, it’s never too soon to start being proactive about managing your future estate when you’ve got dependents and survivors:
Prepare a will. Having a document that makes your end-of-life plans specific clears up any confusion over where (and to whom) you’ve like your assets distributed.
Assign an executor. If no family members or friends can manage the task, consider hiring an attorney. (The same goes for handling your will.)
Keep up to date. Brush up on what inheritance and community property laws are in your state of residence, and make sure your beneficiary accounts are actually exempt from probate collections.
Consider life insurance. To safeguard against the liability of handing debt over to your survivors in death, the right life insurance policy can financially protect your family in the event your debts outweigh your assets.
Stay out of debt. This tip almost goes without saying; to avoid having any problems with debt, in or out of this life, prevent yourself from getting in over your head to begin with. Minimize your credit card usage to maintain a healthy debt-to-credit ratio, and pay off your balance in full each billing cycle. If your home, auto or student loans are too unmanageable, seek to refinance or consolidate your loans for lower interest rates and better terms.