What Happens to Debt When You Die

It’s true, we can’t take anything with us when we die. That’s why it’s important to talk with your loved ones about who gets what after you’re gone—cherished family heirlooms, jewelry, cars and even that signed rookie baseball card you always show off.

But one thing you don’t want to pass on to your loved ones: debt.

What happens to debt when you die? While most debt is paid for by a person’s estate, there are situations where someone else is legally responsible for a person’s debt after they’re gone.

 

What Happens to Debt When You Die?
Can You Inherit Debt?
If the Estate Can’t Cover the Debt
What Creditors Can and Can’t Take
Dealing With Debt Collectors
Debt Is Not a Death Sentence
How to Protect Your Loved Ones From Your Debt

When someone dies, their debt is usually paid by their estate. An estate is all the assets owned at the time of death—like bank accounts, cars, homes, possessions, etc.

The legal process of handling a deceased person’s estate is called probate. This is when the executor of an estate (usually a trusted person chosen in a will) makes sure family members get their inheritance and, if necessary, the deceased’s debt gets paid off.

Let’s say someone had $100,000 of debt when they died, but they also had $200,000 worth of stuff. The executor of the estate would use that $200,000 (selling possessions if necessary) to pay off creditors, leaving $100,000 (minus fees) of inheritance to the heirs.

Now, there are exceptions to what assets go through probate (more on that in a bit). But the bottom line is this: The more debt you have when you die, the less you leave behind for your loved ones. And in some cases, your loved ones may even inherit your debt.

The short answer: Yes. There are certain situations when someone is responsible for a deceased person’s debt. You can inherit someone’s debt if . . .

You’re Listed on a Mortgage

Inheriting a home can be a blessing, but if it’s not completely paid for, you also inherit the mortgage that comes with it. Thankfully, most home co-owners or inheritors are only required to keep up the monthly payments and do not have to pay back the full mortgage all at once. They can also choose to refinance the mortgage or sell the house if they want.

However, if someone inherits a house with a home equity loan, they can be forced to repay the loan immediately, which usually results in having to sell the house. Borrowing on your home beyond the initial mortgage is always a bad idea, so save your heirs the headache by avoiding home equity loans in the first place.

You’re a Joint Credit Card Holder

Did you know your credit card debt can live on after you? If there’s a joint account holder associated with a credit card, that person becomes responsible for keeping up with the payments and any debt associated with the card. (FYI: This doesn’t include authorized card users.)

You’re a Cosigner on Bills and Loans

Cosigning makes you liable (aka legally responsible) for someone else’s debt. If you cosign for a friend’s car loan or personal loan, you agree to make the payments if that person can’t. So, if someone dies or just decides to stop paying, you’re on the hook for their debt. Save yourself and your loved ones the financial stress—don’t cosign for anyone’s loans and don’t let them cosign for you.

You’re a Surviving Spouse in a Community Property State

“For richer or for poorer” takes on a whole new meaning for married couples in the nine states with community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

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In these states, the surviving spouse is legally responsible for any debt the deceased took on during their marriage (including private student loans)—whether the spouse agreed to it or not. Pretty terrifying, right? All the more reason to stop taking on any debt—and to work together as a couple to pay off your debt ASAP.

You Live in a State With Filial Responsibility Laws

Almost 30 states have filial responsibility laws, meaning children can be required to cover their deceased parents’ long-term care costs, such as nursing home or hospital bills. While it’s rarely enforced, you still want to be prepared if you find yourself in this situation.

The Deceased Had a Timeshare

Most timeshare contracts include a “perpetuity clause” where the timeshare becomes part of someone’s estate after they die. That means the timeshare and the obligation to pay those ridiculous maintenance fees can pass on to any heirs.

And while beneficiaries can refuse the timeshare, timeshare companies can still come knocking because it’s technically part of the deceased’s estate and is subject to probate. This is one of the many reasons to avoid timeshares. They’re traps and a huge waste of money. So if you have one, get rid of your timeshare pronto.

What if there’s not enough money in an estate to cover a person’s debt? Well, in the case of “insolvent estates” (meaning there’s more debt than the value of assets), there’s a certain order in which creditors (the people you owe money to) are paid. This process varies by state, but it mostly depends on which category the debt falls into: secured or unsecured.

Secured debt (such as mortgages and car loans) is backed by assets, which are typically sold to pay off the loan or repossessed by the lender. Unsecured debt (credit cards, personal loans, medical bills and student loans) generally goes unpaid if there’s no remaining money in the estate to cover it.

But if there is no one else legally responsible for a deceased person’s debt, how each debt is handled depends on the type of debt.

Medical Bills

In most states, medical debt takes priority in the probate process. It’s important to note that if you received Medicaid any time from age 55 until your death, the state may come back for those payments from your estate, or there may already be a lien on your house (meaning they’ll take a portion of the profits when the house is sold). But since medical debt is so complex and can vary depending on where you live, it’s best to consult an attorney on this one if you’re a surviving relative.

Car Loans

A person’s estate can be used to pay off a car loan. But the lender can repossess the car if there’s not enough money in the estate. Otherwise, whoever inherits the car in the deceased’s will can choose to either continue making the payments if they want to keep the car or sell it to pay off the loan.

Credit Card Debt

If no one else’s name is listed on the credit card account, creditors will make a claim against the deceased’s estate for the debt. If there isn’t enough money in the estate to cover the balance, creditors will typically take a loss and write off the amount.

Student Loans

Federal student loans are forgiven upon death. This includes Parent PLUS Loans, which are forgiven if either the student or the parent dies. 

Private student loans, on the other hand, are not forgiven upon death and must be covered by the deceased’s estate. But since student loans are unsecured debt, they usually go unpaid if there’s not enough in the estate to cover the student loans.

Even if your family isn’t officially liable for the debt you leave behind, having your estate eaten away by creditors can be just as traumatic for them.

Legally, creditors must be notified of a debtor’s passing by either their executor or family members. Creditors then have a specific time frame (usually three to six months after death, depending on the state) to submit a claim against the deceased’s estate to get paid for any outstanding debt.

Thankfully, there are a few things creditors can’t touch from a person’s estate, including:

• Life insurance benefits
• Most retirement accounts
• Contents of living trusts

This doesn’t apply if there are no living beneficiaries listed in the person’s will, though, so be sure to keep those updated!

But otherwise, that beloved boat, prized coin collection, or anything else that has value can easily end up being liquidated (sold for cash) to cover your debts.

Here’s the reality: Debt collectors aren’t much better than grave robbers. Even when someone passes away, credit card companies still want their money, and they have no problem calling up grieving loved ones to try and get it.

Under the Fair Debt Collection Practices Act, creditors can try to get money from a deceased person’s spouse, parent (if the deceased was a minor), legal guardian, executor or administrator of the estate, or anyone who cosigned for the amount owed. But it’s illegal for creditors to discuss the deceased’s debt with—or try to collect money from—anyone else.

So, if you’re another family member or a friend getting these calls and you know you have no tie to the debt, you can tell those heartless creeps to buzz off!

All this talk of debt after death can be overwhelming. But no matter how deep in debt you are, it’s never too late to turn things around!

If you need someone to answer your money questions and help you navigate your specific situation, a Ramsey Preferred Coach is ready to help. Go ahead and schedule your free session today.

And remember, your life is worth more than your debt or how much money you have. Please read that again. We mean it. If you’re feeling like there’s no way out, reach out to someone—maybe find a counselor in your area to talk to. 

If you’re having thoughts of suicide, please reach out to the 988 Suicide & Crisis Lifeline by calling or texting 988. Right. Now.

What if you could have peace knowing your loved ones were well taken care of, instead of worrying about how your debt will affect them after you’re gone?

Half the battle of leaving a good legacy is making sure you prepare for what will happen with your finances after you die. That includes having a good estate plan, getting life insurance, and paying off your debt.

Have an Estate Plan

First off, you need a will. Having a will makes the probate process so much easier on everyone involved—before and after you’re gone. So go ahead and check creating your will off your bucket list pronto!

Getting your affairs in order also means talking with your spouse and children about inheritance, and depending on the size of your estate, meeting with your lawyer. Yes, these kinds of conversations can be awkward and a little morbid, but they can save your family a lot of pain and stress down the road.

Get Life Insurance

Having life insurance is so important! Because it’s exempt from creditors, life insurance basically guarantees that your spouse and children (and whoever else you include as a beneficiary) will get money after you die. Life insurance acts as a shield between your family and the repo man, making sure they have enough to live on even after your assets get cleaned out by creditors.

And listen: Term life insurance is the only way to go. It provides great coverage and ensures that your family is taken care of—plus, it’s a much more affordable option. If you’ve got people depending on your income, you need life insurance. No ifs, ands or buts about it! So, do yourself (and your loved ones) a favor and get a term life insurance quote today.

Pay Off Your Debt

Ultimately, the best way to make sure your debt doesn’t affect your heirs is to pay off your debt—sooner rather than later. We know it’s tempting to postpone dealing with your debt until you’re older, but as we know, debt can outlive us.

Don’t put your legacy on the back burner. It’s never too late to take control of your money and change your family tree!