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What‌ ‌happens‌ ‌to‌ ‌your‌ ‌debt ‌after‌ ‌you‌ die‌

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Talking about things that happen after your death may seem like an odd concept. But when it comes to your money—specifically your unpaid debts—it’s an important conversation to have. In this article, we’ll explain exactly what happens to your debt after you pass away. (Unfortunately—it doesn’t just disappear.) Here’s what you need to know about debt after death.

‌What‌ ‌happens‌ ‌to‌ ‌debt‌ ‌after‌ ‌death?‌ ‌

According to financial and insurance expert, Laura Adams,

“Many people are confused about what happens to debt after you die. Everything you leave behind becomes a legal entity called your estate. What happens to your estate depends on your home state and whether you have a last will.”

After you die, your debt is added to your estate, which is essentially a portfolio of all the assets you have. Your family members can use the money in your estate to pay off the outstanding debt, or can also use money from your life insurance policy if you have one to pay off the debt. However, there are some debts that are forgiven after death.

What‌ ‌debts‌ ‌are‌ ‌forgiven‌ ‌at‌ ‌death?‌ ‌

In some cases, debts owed by people who have passed away are automatically forgiven. For example, federal student loans are always forgiven after someone passes away. Some private student loans may also be forgiven after death, but that’s not always guaranteed.

Depending on the value of the assets in an estate, it’s possible that a deceased person’s family members can’t come up with enough money to repay their debt. In that case, the debt would likely be forgiven. 

“If there isn’t enough cash in your estate to pay outstanding debt, your assets are sold to raise money. (However, some assets, such as retirement accounts, are safe from liquidation to pay creditors.) If there isn’t enough to cover your debts, then your creditors are generally out of luck,” says Adams. 

You might also be wondering what happens to the rest of the estate once the debt is paid off. Adams explains,

“Once your debts are satisfied, the remaining belongings can be distributed according to your last will. If you leave an asset secured by a loan, such as a home or a vehicle, to someone, and they accept the property, they’re responsible for making the loan payments. For instance, if you have a mortgage on your home and your will says that it goes to your daughter, she would have to make the mortgage payments or sell it.”

Who‌ ‌is‌ ‌responsible‌ ‌for‌ ‌your‌ ‌debt‌ ‌after‌ ‌your‌ ‌death?‌ ‌

Ultimately, your family members become responsible for your unpaid debts after you pass away, with the exception of student loans. They take the money directly out of your estate, so they don’t have to dip into their savings accounts. However, there are several exceptions to this, in which case a family member does become personally financially responsible for the debts. 

“In general, if a debt is in your name only, creditors can’t go to your family, friends, or heirs to collect it. However, an exception is being married and living in a community property state, where your spouse may be liable for debts in your name. Also, if you die with co-signed debts, such as a credit card or student loan, the co-signer becomes entirely responsible for your debt when you die,” says Adams.  

Here are some of the circumstances when a family member or specific person does become financially responsible for repaying debts.

Your state has community property laws

Community property laws state that spouses assume an equal share of all the assets that were acquired during their marriage, which includes debt. Currently, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin have community property laws. If you live in one of these nine states, the surviving spouse becomes responsible for any unpaid debts.

Your state has filial responsibility laws

In states with filial responsibility laws, adult children are legally obligated to pay for their parents’ long-term care needs if they can’t afford the cost themselves. However, this law only pertains to adults who cannot physically afford any type of long-term care and are typically living under the federal poverty line.

You’re a co-signer on an account

If you co-sign an account with another person, you automatically become responsible for the debt if the other person passes away. For example, if you co-sign a bank account with an elderly parent, you would have to repay their credit card debt if they pass away. Shared financial responsibility is one of the reasons why some financial experts warn against co-signing on an account.

‌You’re part of a joint account

If you are listed as a joint account holder on a bank account, credit card or loan, you will also become financially responsible for the debt if the other person dies. For example, if you and your spouse are joint account holders on a bank account, and your spouse passes away, you would have to cover the full cost of the remaining balance. However, if you and your spouse have separate bank accounts, you would not become responsible for their debt if they pass away.

What‌ ‌assets‌ ‌are‌ ‌safe‌ ‌from‌ ‌creditors?‌ ‌

Not every asset in a deceased person’s estate is allowed to be used to pay off their outstanding debt. That’s beneficial for family members because it means they can keep some of their inheritance instead of it being taken by debt collectors. Here are some of the assets that are safe from creditors.

Life insurance policy

If your loved one has debt when they pass away, creditors cannot take the money in their life insurance policy. However, you can choose to put some of the money in their death benefit towards repaying their debt if you choose.

Payable-on-death accounts

Payable-on-death accounts, like a 401K or IRA, have a beneficiary. When the account holder dies, their beneficiary receives the money in the account. That means creditors are not legally allowed to take money from deceased’s payable-on-death accounts, even if they owe money. 

Why‌ ‌you‌ ‌need‌ ‌life‌ ‌insurance‌ ‌

It’s very common for people to have debt after they pass away. Debt comes in many different forms—unpaid credit card bills, outstanding medical costs, an active mortgage—and it can be incredibly expensive. That’s why having a life insurance policy can be so beneficial. It helps your loved ones cover the cost of your unpaid debt after you die so they don’t have to use money out-of-pocket.

Life insurance has many benefits besides helping cover debt. It can provide extra income during retirement, help pay for your funeral and financially support your loved ones after you die. Some life insurance policies can even be used as an investment vehicle which allows you to grow your money during a good market year.

The‌ ‌takeaway

  • After you die, your debt gets added to your estate, with all of the other assets you own.
  • In some cases, your family members can become personally responsible for repaying your debt after you die.
  • Having a life insurance policy is one option to help cover debt after your death.

In most cases, creditors don’t simply forgive your debts after you pass away. Your family members have to sell the assets in your estate to repay the cost. However, there are also some circumstances where family members become personally responsible for your debt. Purchasing a life insurance policy ensures that your family members have enough money to repay any debts that are left over after your death.

Elizabeth Rivelli

Elizabeth is an insurance writer for coverage.com, where she covers insurance providers and reviews policies to help consumers find comprehensive and affordable coverage for every area of their life. She has more than three years of writing experience for top online insurance and finance publications.

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