What happens to your debt after you die?

Owing money on outstanding debt can cause a variety of issues for us while we're alive, especially if we allow it to spiral out of control. Debt can be a serious issue to deal with, whether it's debt from an unpaid mortgage loan, personal loans in default, a car loan with outstanding payments, or credit card bills that are past due. But what happens to our debt when we pass away?

The good news is that after you die, most of your debt is passed on to your estate rather than your heirs, which means that the money you owe will most likely be taken from your estate rather than your loved ones' wallets. The rules for a deceased person's debt, on the other hand, can be complicated. For example, while not all belongings in an estate can be seized by debt collectors, if you die without a will, the assets in your estate may not be passed down to the beneficiaries. That is why, if you have debt, it is a good idea to fully understand how it will be settled after you pass away.

Who is responsible for your debt after you die?

If you have children or a surviving spouse, you may be concerned about what will happen to your debt after you die, which is understandable. In some cases, the surviving spouse may be held liable for debts left behind by the deceased.

Certain individuals may inherit your debt even if they are not related to you, depending on their relationship to you and your debt. These are the people:

• Spouses: When a spouse dies, some states require that community property be applied to debt. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, South Dakota, Tennessee, Texas, Washington, and Wisconsin are among them. Alaska and Oklahoma have elective provisions for communal property if the agreement was signed prior to or during marriage.
• Joint account holders: If you open a bank account with someone else, that person is liable for any debts associated with that account.
• Co-signers: If you take out a loan with another person for a business, house, or car, he or she will be responsible for any payments after you die.
• Estate executors (in some cases): Although executors are generally not personally liable for an estate's debt, they can be held liable if they are careless with the estate's assets or fail to pay the estate's debts before allocating assets to beneficiaries.

What types of debts can be inherited?

As previously stated, some debts can be inherited, but this is dependent on a number of factors, including the type of debt.

Medical bills

Each state has its own rules regarding how medical debt is handled after death. Medical debt, on the other hand, is usually the first debt settled by an estate. If you receive Medicaid after the age of 55, your state will almost certainly file a claim against your home to recoup any payments you received. Because medical debt has many nuances, you should consult an attorney to understand how your debt will be settled when you die.

Car loans

A car loan is a type of secured debt, which means that the loan is secured by the car itself. If you are still making car payments when you die, the car will be repossessed unless someone chooses to continue making payments after your estate has cleared your debts.

Credit card debt

Credit card debt is unsecured debt, which means you don't have to secure it with your home or car in order to open one. When you die, your estate is responsible for paying off any outstanding debts. If your estate is unable to do so, the credit card company will be unable to collect.

Someone else is only responsible for your credit card debt if they have a joint account with you. This is not to be confused with an authorized user. Many parents add their children as authorized users to their accounts, but this is not the same as having a joint account.

A joint account holder opened the account with you and is thus held equally liable for the debt. This is why a joint account holder must continue to make payments.

Mortgage

A mortgage, like an auto loan, is a type of debt that is secured by the object it was used to purchase, which is the home itself. If you did not co-sign the loan, your estate will be used to pay off any remaining balance when you die.

If you leave the house to someone else and your estate is unable to cover the remaining balance, that person will be obligated to make all future payments. If there is a joint owner who did not co-sign the mortgage with you, they must either sell the home and pay the balance off or continue making payments to keep the home from being foreclosed on.

Student loans

Because student loans are unsecured debt, the lender is out of luck if your estate is unable to pay off any remaining student loan payments. If you co-signed the loan with someone else, the co-signer must take ownership of your debt, just like every other type of debt on this list. If you live in an Arizona, California, Idaho, Louisiana, Nevada, New Mexico, South Dakota, Tennessee, Texas, Washington, or Wisconsin community property state, your spouse is liable for the debt.

Federal student loans are typically forgiven upon the death of the borrower. Some private student loans are also forgiven upon the death of the borrower (Sallie Mae and Wells Fargo, for example).

Can items be taken to pay debts?

Creditors have access to the majority of the items listed in your estate, but there are a few exceptions. Assets that could be used to pay off debt include:

• Real estate
• Vehicles
• Securities
• Jewelry
• Antiques
• Family heirlooms

Life insurance benefits, retirement accounts, and living or irrevocable trusts are examples of assets that cannot be used to pay off debt. With so many assets that can be seized, keeping track of what you own and what you still owe is critical. With careful planning, you can protect and preserve a large portion of your estate for your beneficiaries.

You could, for example, use an irrevocable trust to protect your assets while potentially lowering your estate taxes. Once the trust document is filed, the assets placed in it no longer belong to you. However, once the trust is established, the assets placed in it cannot be transferred back into your name.

Protecting your heirs with life insurance

In the event of your untimely death, your life insurance policy could become your family's primary source of financial support, especially if creditors seize everything else. Life insurance, like other pay-on-death benefits, is immune from creditors, and the money goes to your beneficiaries. Even if there are insufficient assets in the estate to pay off debt, creditors cannot use the life insurance benefit for that purpose. Your beneficiaries, on the other hand, are free to spend the money however they see fit, and if the benefit is large enough, it may be used to pay off a mortgage or other loans. The money from life insurance also ensures that your family can continue to live in the house and carry on with their lives after your death.

When looking for a life insurance policy, it may be beneficial to shop around and obtain quotes from various providers. This allows you to get a better sense of what coverage options are available, what the associated costs may be, and what policy may be best for you. It may also be advantageous to obtain quotes and weigh options from some of the best life insurance companies in order to determine which companies offer the most competitive rates and policies.