Debts typically become the responsibility of your estate after you die. Your estate is everything you own at the time of your death. The process of paying your bills and distributing what’s left is called probate.
The executor of your estate — the person responsible for dealing with your will and estate after your death — uses your assets to pay off your debts. This might include writing checks from a bank account or selling property to get the money. If there isn’t enough to cover your debts, creditors generally are out of luck. But this also might mean that your debts eat up assets that you had hoped to leave to heirs.
And, in some cases, family members could be on the hook for your debt. Understanding how your debts can impact those you leave behind is an important part of estate planning.
Who can inherit your debt?
After you die, the following four parties could become responsible for your debts:
- Co-signers on a loan.
- Joint owners or account holders.
- Spouses in community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Community property from a marriage can be put toward debt obligations, but spouses aren’t responsible for debts that predate the marriage.
- People tasked with settling the estate’s debt who didn’t comply with probate laws.
What types of debt can be inherited?
Here are some common types of debt that might become someone else’s burden after you die:
Mortgages and home equity loans
If you’re the sole owner of both the property and the mortgage, your estate is responsible for paying back the loan. However, anyone who inherits the home may be subject to the debt if it’s passed directly to them. In that case, they can sell the home to repay the debt or assume ownership and continue making payments. Alternatively, the executor might use the estate’s assets to pay off the loan before the home is passed to heirs, removing their burden of debt. It’s worth noting that when ownership of a mortgaged property is transferred, lenders can request proof that the new owner has the ability to repay the debt, and can even demand immediate repayment. Federal guidelines exempt family members from these rules.
Co-signers on a mortgage are directly responsible for the debt, as they took out the loan with the deceased. Joint owners named on the deed who didn’t co-sign the loan aren’t automatically responsible for payments, but they may want to take over the debt to prevent the lender from repossessing the home.
Mortgage protection insurance can be used to repay home loans in the event of your death, but it’s often expensive. If you have an heir who will assume ownership or inherit a home with a mortgage, talk to a financial advisor before proceeding.
Credit card debt
The outstanding balance on a credit card is a type of unsecured debt. This means that if the estate can’t pay the balance, the credit card company is out of luck. However, any joint account holders must settle unpaid bills as they are equally responsible for the loan.
People who are simply authorized users of a credit card aren’t responsible for paying the balance. But spouses living in community property states may still be responsible as their debts are shared.
Car loans are typically paid out of your estate. But because they’re a type of secured debt, if payment isn’t received, the lender can repossess the car. If your estate can’t pay off the loan and your heirs want to keep the car, whoever inherits the vehicle can continue making payments.
Private student loans are a type of unsecured debt, which means lenders have no recourse if the estate doesn’t have enough money to repay them. However, co-signers of private student loans taken out before Nov. 20, 2018, may be responsible for the remaining debt. In community property states, the spouse is responsible if the student loan debt was incurred during the marriage.
Some lenders of private student loans forgive the debt upon death, including Sallie Mae and Wells Fargo. All federal student loans are discharged upon your death. If a student’s parent has a federal PLUS loan, it’s discharged upon the death of either the parent or student.
What creditors can and can’t take
Creditors typically can’t go after certain assets like your retirement accounts, living trusts or life insurance benefits to pay off debts. These assets go to the named beneficiaries and aren’t part of the probate process that settles your estate.
You can use a life insurance policy to help family members cover debts that could pass to them, or to simply make sure they’ll have money after you’re gone.
One important note: If your policy’s life insurance beneficiaries are no longer living, the death benefit may pass to your estate and be subject to creditors. One way to avoid this is to keep your beneficiary information updated.
Under Federal Trade Commission rules, debt collectors can contact a deceased person’s spouse, parent, guardian, executor or administrator to discuss the debt. But collectors can’t mislead family members into thinking they’re responsible for paying the debts if they’re not.
Your family members have the right to stop a debt collector from contacting them, but if they’re responsible for the debt, they’re still required to pay it back. Read more from the Federal Trade Commission.
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