What Happens to Your Debt When You Die

When you’re alive, you’re responsible for your own debt, but what happens to debt when you die? Is it forgiven, or can your creditors ask those closest to you to pay it back? Although it’s not a pleasant thing to think about, it's an important consideration and can help ensure the financial wellbeing of those you’ll leave behind. Ultimately, there are a number of factors that come into play when figuring out responsibility for debt after death. The answer depends on where you live, the type of debt and your unique situation. Let’s take a closer look at this important yet often overlooked question.

Who is responsible for your debt after you pass away?

Here are a few examples of certain people in your life who are most likely to inherit your debt, including:

• Spouses: If you live in a community property state, your spouse will have to put your joint assets toward your debts if you pass away.

• Joint account holders: If you open up a joint account with someone else, they’ll have to repay any of the debts tied to it.

• Co-signers: If your loans are cosigned with another person, they’ll still be liable for your debts after your death.

• Estate executors: If the executors of your estate make certain mistakes while managing your assets or don’t repay the estate’s debts before giving assets to your beneficiaries, they may have to pay them back.

Types of debt and what happens to them after death

In a perfect world, your debt would simply disappear after you die. But the reality is that the type of debt you have may decide whether it’s forgiven or not. Let’s take a closer look at the two main types of debt and how your passing may affect them.

Secured debt

Secured debt is backed by collateral or an asset you own, like a house or car. If the debt can’t be repaid by your estate (the property and assets you leave behind when you die), the lender could take your collateral as a form of payment. Some of the most common examples of secured debt include mortgages, auto loans and home equity lines of credit (HELOCs).

Let’s say you leave behind a mortgage after you die, and your estate is unable to repay it. The owner of the mortgage may put your home into foreclosure if the mortgage goes unpaid. If that happens, it will no longer be available to your estate or your loved ones.¹

Unsecured debt

Unsecured debt doesn’t involve collateral. Credit card debt, some personal loans, student loans, and medical bills are all types of unsecured debt. If you pass away with unsecured debt, it becomes the responsibility of your estate. Whoever is in charge of your estate, like an executor, the person who is legally responsible for ensuring your wishes are followed and debt obligations are settled, may divide and sell your assets to pay those debts.

Note that if you don’t have enough money in your estate to cover the unsecured debt, it will remain unpaid. If there is a surviving cosigner on any of the debt, they’ll be liable for it. Also, if you live in a community property state, your surviving spouse may have to pay back any of your other unsecured debts.

Here’s why: In a community property state, spouses equally own all assets and debts they have during the marriage, no matter who acquired the asset or debt.² There are nine community property states, including:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

It's important to consult with a lawyer or a financial advisor to plan ahead, especially if you live in a community property state.

How to inform creditors of death

If you planned ahead and prepared a will, the executor you name in the will handles your estate. If there is no will, the court located in your jurisdiction will appoint someone to manage the estate to move forward with the probate process. Probate is a lengthy legal process to review and distribute your assets and settle any debts.³

It’s important that your loved ones or the executor of your estate tell your creditors of your death as soon as they can. They’ll need to send each creditor a copy of your death certificate. In most cases, your creditors will put a hold on any debt collection activities while your estate is getting settled.

Once they’re informed, the creditors will also notify the three major credit bureaus (Experian, TransUnion and Equifax) that you passed away. Your loved ones or estate executor may want to contact the credit bureaus directly to receive copies of your credit reports. That way, they’ll have a list of all your creditors in one place and simplify the probate process.

The earlier you design a plan to manage and pay off any debts, the easier you’ll make life for your loved ones —and erase their worries about leaving them with financial burdens.

Ways to pay down debt

If you design a plan to manage and pay off your debt while you’re alive, you’ll make life easier for your loved ones — and erase the worry of your debt outliving you. Fortunately, there are a number of debt payoff methods that could help you reduce or even eliminate your debt altogether, including:

• Debt Snowball: With this method, you pay back the debt with the smallest balance first, regardless of the interest rate. Once that debt is paid off, you apply that payment to the next-smallest balance, creating a “snowball” as your applied monthly payment grows from each debt that is repaid. You must still make minimum payments on any other debt balances.

• Debt Avalanche: The main purpose of the debt avalanche method is to save as much money on interest as possible by focusing on the highest-interest debts. Once you pay off your debt with the highest interest rate, you’ll repay the debt with the next-highest rate and continue until you’re debt free. As with the debt snowball method, you must still make minimum payments on all other debts while putting more money toward higher-interest debts.

• Debt Consolidation: Debt consolidation combines multiple high-interest debts into one, easy-to-manage payment. It may eliminate the need to keep track of several debts with different due dates. The main purpose of debt consolidation is to combine all debts into one with a lower interest rate to help you repay your debt faster.

• Debt Management Plan: Typically offered by credit counseling agencies, debt management plans involve negotiations with your creditors to try to secure lower rates and payments. Every month, you’ll make one payment directly to the agency, which will then pay your creditors on your behalf.⁴

Plan beyond the inevitable

Most people don’t want to think about death and debts. However, by understanding what happens to debt when you pass away, your loved ones may be better prepared to focus on the important things when the time comes and avoid financial obstacles down the road. If you have any questions about this topic, don’t hesitate to consult a qualified attorney and/or financial advisor in your state for specific advice. By facing the tough topics head on, you can confidently know that your family is taken care of, even after you’ve passed on.

Sources:

1 https://www.bankrate.com/mortgages/what-happens-to-mortgage-when-you-die/
2 https://www.investopedia.com/personal-finance/which-states-are-community-property-states/
3 https://www.investopedia.com/terms/p/probate.asp
4 https://www.investopedia.com/debt-management-plans-8426688.