Who Is Responsible for My Debt When I Die?

debt-after-death

Debt is persistent. In many cases, not even death can erase it, and you can rest assured your creditors will attempt to collect what you owe when you pass away. You may be worried that, upon your death, your outstanding debt could negatively affect your loved ones.

The parties responsible for your debt depend on where you live and what types of debt you hold. Usually, either your estate (your total assets at the time of your death) or your loved ones will assume responsibility.

When Your Estate Is Responsible

If you’re worried about passing your debt onto your loved ones, there is some good news: In most cases, they won’t have to dip into their own pockets to repay what you owed. When you took out a loan or opened a credit card, the responsibility to pay became yours, and that obligation can’t be extended to your loved ones (unless you live in a community property state — we’ll get to that soon).

But that doesn’t mean the debt is wiped clean. Your loans, credit card debts and even Medicaid long-term care costs must be settled. Your estate will enter the probate process, in which the executor of your estate pays off your debts and distributes what is left over, according to the directions left in your will (or state law, if you don’t have a will). This is a good reason why families may not want to start splitting up possessions before the probate process is completely executed.

If there isn’t enough money in your estate to cover your debts, your remaining debt is usually wiped clean, but you’ll want to check with your local authorities before making any assumptions.

When Your Loved Ones Are Responsible

In some cases, your loved ones could be liable for your debts. Co-signers and co-borrowers aren’t off the hook for debt they share with you if you pass away. That means any credit cards or loans you officially share with another person will become that person’s responsibility (authorized users don’t count).

Mortgages are a different matter. Joint owners and heirs don’t have to pay off a mortgage immediately. If you leave behind a spouse, or leave your home to a relative, that person can usually take over the payments. Alternatively, they can sell the home to cover the mortgage and any home equity debts.

Community property states place additional burdens on spouses. If you are married and live in one of the community property states – such as California, Texas or New Mexico – assets and debts acquired after your marriage are shared. For instance, if you opened a credit card in your name after getting married, your spouse may still be responsible for that debt in a community property state.

Some Exceptions

Both your estate and your relatives are safe from having to repay your federal student loan debts, which are completely forgiven when you die. (Note: This is not the case for private student loans.) Also, in most states, your retirement accounts or life insurance payouts are safe from creditors and go directly to the beneficiaries outlined in your will.

Laws vary from state to state, and can get pretty complicated if there are several different types of debt or many beneficiaries to an estate. To help reduce the obligations left to your loved ones after your death, you may want to hire a lawyer, create a will and appoint an executor of your estate. This way, you can declare your intentions for your estate and reduce the chance of legal or financial complications in the event of your death.

[Editor’s Note: You can keep an eye on how your debts are affecting your credit by viewing two of your credit scores, updated every 14 days, on Credit.com.]

Image: Pali Rao

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