One of the unfortunate facts of life is that many of us have far too many debts to fully pay off in our lifetime, with nearly 75% of Americans dying with outstanding debt.1 That can be a source of stress, as none of us want to worry about leaving debt behind that would burden our loved ones. While some of our debts are forgiven after death, most of them do not. As such, it is important to get familiar with estate laws and be aware of what debts will remain when you are gone and how they will be handled.
Who Is Responsible for Your Debt?
Most debt does not go away when a person dies. Instead, after your death, it becomes their estate’s responsibility to pay off any unpaid debts that remain. During this time, your estate will enter probate, a court-supervised process that identifies and gathers your assets and pays off your debts. If there is any money left after paying outstanding debt, the remaining assets are distributed to your beneficiaries. The estate’s finances are handled by the personal representative, executor, or administrator. That person pays any debts from the money in the estate, not from their own money.
With some exceptions, family members aren’t legally required to pay off a deceased relative’s debt. That said, there are exceptions to this rule, mostly based on state laws. For example:
- If there was a co-signer on a loan, the co-signer owes the debt
- If there is a joint account holder on a credit card, the joint. account holder owes the debt.
- If state law requires a spouse to pay a particular type of debt.
- If state law requires the executor or administrator of the deceased person’s estate to pay an outstanding bill out of property that was jointly owned by the surviving and deceased spouse.
There is also the case of community property states, which require the surviving spouse to use community property to pay debts of a deceased spouse. Community property states include Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Outside of these scenarios, only your estate owes any debt.
What Debts Will My Loved Ones Need to Worry About?
Though the bulk of your debts is not required to be paid off by your loved ones, the repayment process can still impact your legal heirs, as all debts must be paid before they receive any type of inheritance mentioned in your will or other estate planning documents. Additionally, there are certain debts that might need to be covered by your loved ones themselves. The most notable examples of this include:
- Auto Loans: Since auto loans are secured loans, the car you purchase with one will serve as collateral. After you die, your estate will have to repay the car loan and if there isn’t enough money to cover the debt, the lender can repossess the vehicle. Alternatively, a family member or friend can take over the monthly payments in your stead.
- Credit Cards: While credit card balances cannot be inherited unless you have a joint account holder, your estate will have to pay them off before your heirs can get any money.
- Mortgages: If you die with an outstanding home loan, your spouse can take over the payments. Other heirs can also inherit the home but not the mortgage itself. Yet while they can’t be held legally responsible for making payments, the mortgage still has to be repaid from your estate, or the home will have to be sold.
- Student Loans: How your family will have to deal with student loans depends on whether they are federal or private. With federal loans, your family can apply for a loan discharge due to death. This tends to work without too much complication. However, if you have private loans, the rules can be more complicated. Not all private lenders discharge student loans debts after the borrower dies, so you should check your lender’s terms to be certain about their requirements.
While some debts are forgiven after death, you should never assume that this is the case with all of them. Always do your research ahead of time to be sure what happens to your debts after you pass. Only then can you know for certain what your estate or your family members will have to deal with when you’re gone.
1. Calfas, J. (2017, March 22). Americans Have So Much Debt They’re Taking It to The Grave. Money. https://money.com/americans-die-in-debt/
About the author
Founder/Attorney, CCSK Law
I create customized solutions for families to address their planning needs.
I provide plans clients understand. Also, they make sure they know when to use them, and do so affordably. I love the opportunity to break through the legal jargon to clarify issues. We find success when we work through a person’s situation and put the law to work for them.