Debts, especially big ones that it is extremely hard to pay, are risky. It could lead you to the worst point of financials, bankruptcy.
However, there is a worse thing than leading yourself to bankruptcy. Leading your loved ones to bankruptcy.
According to Investopedia, approximately 75% of Americans die with outstanding debt, imagine how unpredictable and hard this must have be for the deceased’s family.
If you as the head of your house have debt too then you should know what happens to your debt when you die.
The debt you have does not disappear when you die. The debts under your name could be paid by your properties or estates that you own.
Anything could be used to pay off your debts after your death. But, if your debt is not paid even after your estates, these debts will inherit by your next of kin.
However, not every type of debt is inheritable; some debt stays as it is and vanishes since it is not inheritable1.
- Co-signed loans, community property states, and credit cards are inheritable loans.
- Creditors can take anything besides your life insurance benefits, retirement accounts, and any amount you have in living trusts in the case of the death of the debtor.
- If your spouse has a joint account with you, then in case of your death, he/she will have to bear the debt and vice versa.
- In some states, you have to pay every bit of debt that your spouse took out during your time of marriage.
What Happens To Your Debt When You Die?
As a thumb of rule, your estate takes care of your unpaid debt when you die if it is under only your name.
Your estate includes all the assets you possess, including your house, vehicles, jewelry, etc.
Your estate’s executor (the person chosen by you in your will) takes care of the allocation of your estate. This process is referred to as probate.
However, there are certain situations in which your family members might have to bear your debt. We have discussed it all further below. 2
Here’s What Reddit Users Know
ELI5: What happens to your debt when you die if you have nothing?
by u/rootbeerandsmoke in explainlikeimfive
What Kind of Debts Is Inheritable?
There are several types of debts that are inheritable, and it is important to note that majority of debts are inheritable; only small and extremely common debts are not inheritable.
If you co-sign a loan, you have to pay that loan even if the other party is not able to, in situations like debt.
So, when you die, this debt will go to the other co-signing party or to your next of kin if both of you are unable to pay it.
Community Property States
Some states (like California, Arizona, Idaho, and six other states where you can find the rest on the internet) have community property laws where you have to pay every bit of debt that your spouse took out during your time of marriage; even the personal loans will be under your name if your spouse passes away.
Credit card loans are tricky because even though they are inheritable, there are cases where the debt just gets written off.
If you have a joint account holder, they will be responsible for paying it, if there is no one associated with the account, your estates will cover it, but in the case when your estates cannot cover it, too, the debt will be written off.
Medical debt is the most difficult to deal with. If the deceased received Medicaid at any time between the age of 55 till the time of death, then the state may come for that payment.
Or they can even lien on your house (take a certain portion of profits when the house is sold.) Medical debt is complex to deal with, and the way it is dealt with differs from state to state, so its best you consult with your attorney in this case.
If you die and you didn’t co-sign the loan, then your estate will be used to repay the remaining balance.
And if you co-signed the loan, then the home co-owner or the joint owner will be responsible for making future payments.
They are required to keep making monthly payments and do not have to repay them back in a lump sum. They can even choose to sell the house to avoid it from going into foreclosure.
Car loans are secured debts, so if you die, then either someone from your family can choose to continue making payments, or the company can repossess the car.
Federal student loans and Parent PLUS Loans are forgiven upon death. However, private student debts are not.
In the case of such private student debts, the deceased person’s estate is used to cover the debt, and if it is not enough, then the lender will have to let it go.
However, if you live in Community Property States (mentioned above), then the spouse will have to bear the deceased person’s student debt. 3
What Can Creditor Take as an Estate?
First thing, you have to notify the creditor of the death of the debtor. Then, the creditor submits a claim for the dead person’s estate for their debt.
However, there are limits as to what the creditor can take as an estate.
The creditors can take away the following listed things from the deceased person’s estate:
- Their house
- Family heirlooms
They can take anything besides your life insurance benefits, retirement accounts, and any amount you have in living trusts.
(However, this does not apply if no one was listed in the beneficiaries list of the deceased.)
The harsh truth is that creditors are heartless predators, and they come after your unpaid debt; some even go to the extent of harassing your grieving family. 4
Read: What Is Debt Management?
The Importance of Life Insurance
Even when your family isn’t responsible for your paying off the debt that you leave behind, giving an opportunity to those predators to take away your home, vehicles, and other valuables would only cause more pain and stress to your family.
To avoid your family suffering like this after you are gone, you should take life insurance.
Life insurance guarantees money to the deceased person’s family or whoever the beneficiary is after you die.
This ensures that they have enough money to survive even when all of their other possesions are cleaned away by the creditors. 5
How To Protect Your Family From Your Unpaid Debt?
Instead of worrying about your family’s needs after you are gone, you should focus on how you can protect them against such horrible situations.
Here’s what you can do:
Pay off your debts
It cannot be more simple than this. If you do not want your family to suffer after you are gone, then ensure that you repay your debt as soon as possible. Avoid taking extra loans, stop using or if not, limit using your credit cards.
If you are in a lot of debt, then talk with a credit counselor or consider options like debt settlement, debt consolidation, etc.
If you do not owe any loan as of yet and do not want to get into such a dreadful situation, then build healthy spending habits, make investments, keep emergency funds, and avoid getting a credit card at all.
People avoid estate planning to avoid the uncomfortable and morbid conversation about death.
But the truth is you do not know when you are going to die and so it is important to discuss inheritance and to legally allocate your estate to your spouse or kids or whoever you like. This will help in a smooth probate process after your death. 6
What happens to your debt when you die is extremely tricky and also risky for your spouses because if your estates cannot pay off the debts you have, your spouses will most likely have to take care of those debts, which could create massive problems for them financially in case of the debt being extremely high.
However, not every debt is inheritable, and some of them could get written off if there is no one or nothing that they can take, like credit card bills.
What happens to the estate when the beneficary dies before you?
If the beneficiary dies before you, then the estate listed under their name will be returned to your estate. A deceased person cannot inherit any assets from your estate. 7
Are children liable for repaying your credit card debt?
If the child was a joint-account holder along with you, then yes, they will be responsible for repaying your credit card debt.
Which type of debts are forgiven when you die?
No debt is instantly forgiven after your death in a technical sense.
However, credit card debts and students are easier and more likely to be forgiven when compared to other type of debts.
Traci is a highly experienced debt resolution expert with over 8 years of expertise in helping people become debt-free through various debt relief programs. As a former employee of a well-known debt relief company, she possesses exceptional knowledge and skills to take care of debt-related issues.
When not writing about debt, Traci can be found conducting in-depth research on the latest developments in the industry to ensure that she stays up-to-date with the latest trends and strategies.
The National Planning Cycles is committed to producing high-quality content that follows industry standards. We do this by using primary sources, such as white papers and government data alongside original reporting from reputable publishers that were appropriate for the accuracy of information while still being unbiased. We have an editorial policy that includes verifiable facts with due credit given where applicable.