If you’re wondering what happens to your debt when you die, whether it’s your own debt or a family member’s debt, know that it largely depends on the type of accounts.
Here’s everything you need to know about the most common outstanding debts left after a person passes away.
Estate vs. Probate
Before jumping into what happens to your debt when you die, it’s important to understand two concepts: estate and probate. An estate refers to a person’s net worth, including their assets, such as property and bank accounts.
When a person passes away, the estate (meaning their assets) are used to pay off any debt. After that, the remaining assets are distributed to the individual’s beneficiaries.
The process of paying off debts and distributing any leftover assets is called probate and can be taken care of by a probate court or by an executor if there is a will in place.
What Debts Have To Be Paid When Someone Dies?
For many people, the deceased person’s assets are not enough to cover their outstanding balances after death. What happens next depends on the type of debt that remains.
The executor of the will is responsible for dealing with creditors. When a family member passes away and debt collectors start calling, simply direct them to the executor of the state.
Is Family Responsible for the Deceased’s Debt?
This depends on the type of debt. The family is responsible for a mortgage, for example, in a couple of different scenarios. The first is if there’s a joint owner on the home, such as a spouse.
Alternatively, whoever inherits the house can either opt to keep it and make mortgage payments or sell it to settle the debt.
What Debts Are Forgiven at Death?
So what happens to your credit card debt when you die? First, balances are paid down directly from the estate. But since credit cards aren’t secured by property, there’s a chance that any remaining debt could be forgiven.
If a credit card has a joint account holder, that person is responsible for the remainder of the balance. Authorized users, on the other hand, don’t have to make any additional payments.
In nine states, there are community property laws in place, which make spouses liable for outstanding debt. They are:
- New Mexico
When a loved one passes away, especially after a long illness, it’s natural to wonder what happens to medical debt when you die. A surviving spouse is responsible if you live in one of the nine states with community property laws.
Otherwise, the medical debt is paid off from the estate during probate. If there are not enough assets to cover the debt, no other family members have to pay for the outstanding medical debt.
Car loans are handled either by paying off the balance directly from the estate or by selling the car. The vehicle can be repossessed if no payments are made by the inheritor.
Student loans are another common concern after someone passes away. Federal loans are automatically discharged, while private student loans are paid from the estate. However, a lack of assets can result in these loans being discharged, unless there’s a co-signer.
It’s not pleasant to think about debt while also dealing with the death of a loved one. But planning with tools such as a will and life insurance can help ease the burden for those left behind.