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Death and finances—two incredibly sensitive topics that people seldom want to discuss. While it may be uncomfortable, having these discussions with loved ones, whether it’s fast approaching or not, is an important step in planning for the future. This is where Clarity can help. We understand how overwhelming financial matters can be, especially when it comes to debt. Read on for a look into one of the tensest questions you can ask: what happens to your debt when you die?
The basic rundown: what happens to your debt when you die?
Like any of our belongings, debts don’t disappear when we pass. If you have debt, know that it won’t vanish either. While each circumstance and situation is unique, there are three ways it can go and a quick example for each.
Quick note before we begin, an estate here is defined as an assigned executor or administrator who manages the estate’s assets to settle outstanding obligations. This term will be used frequently throughout the article so it’s best to get well acquainted with it.
Outcome 1: Paid by your estate
The usual outcome is that debt from a deceased person only gets paid by your estate (all your assets – bank accounts, cars, homes, possessions, etc.) when you pass. How? Through a process called Probate – a court-supervised procedure that:
- Validates the deceased’s will,
- Assesses and appraises their assets,
- Pays off any debts and taxes,
- And distributes remaining assets accordingly.
Example: Daniel passes away with over $10,000 in credit card debt and $40,000 in savings. Through probate, his estate will pay off the debt (point three in the above list) before distributing the remaining money from his savings to his heirs.
Outcome 2: No estate or insufficient assets
What happens to your debt when you die if you have no estate? If you don’t have any assets or not enough assets to pay off the debt, it gets inherited. This usually transfers to a family member or the next of kin as per your will. Additionally, creditors may seek repayment from co-signers, joint account holders, or, in some cases, spouses (depending on state laws).
If you’re wondering whether debts can be “inherited”, the answer is no. Rather, beneficiaries who are directly tied to the debt are responsible for paying them off. However, remember that not all debts can be paid off using assets (more on that in the next section).
Example: Denise and her daughter co-signed a personal loan. Due to the nature of “co-signing”, the responsibility of paying off that debt now falls entirely on her daughter.
Outcome 3: No estate or next of kin
Sometimes, a person will pass and have no next of kin (in addition to no estate). So, what happens to your debt when you die and have no family? It usually goes unpaid (or back to the first outcome and is paid off by your estate). If it’s a secured debt, then the lender will seize the collateral.
Example: Sandra has no heirs or estate and has passed away leaving behind an unpaid automobile loan. In this case, the lender has repossessed the car to recover the debt.
But then comes the question: what kinds of debt can be inherited?
Which debts can be inherited?
When a person passes away, how their debt is handled mainly depends on the type of debt they leave behind. Let’s quickly review the two main types of debt – secured and unsecured debts:
- Secured debts are tied to assets (mortgages, car loans, etc.) that can be claimed.
- Unsecured debts are not backed by any assets.
It is essential to understand the difference between secured and unsecured debts when it comes to debt collection and what happens to your debt when you pass away. Secured debts are prioritized and typically associated with collateral. This means lenders can claim assets if the debt is not paid off.
On the other hand, unsecured debts such as credit card debt, personal loans, and medical debt are not linked to any collateral. They are covered by the estate or discharged. This means these debts are paid from the assets left behind after your death.
For instance, if you pass away with credit card debt, the estate may use the remaining assets to pay off the debt. However, if there are no assets in the estate, the debt becomes the responsibility of your heirs if they are joint account holders or co-signers.
A simple breakdown of which debts can and cannot be inherited
| Debts that can be inherited | Debts that typically aren’t inherited |
| Mortgage Debt
If the property is inherited, the heir may also inherit the debt. However, they usually have options to refinance or sell the property. |
Credit Card Debt
Individual credit card debt is usually not inherited unless there’s a joint account holder. |
| Co-signed Debts
Any debt with a cosigner can become the sole responsibility of the co-signer upon the debtor’s death. |
Personal Loans
Unsecured personal loans in the deceased’s name are generally not passed on to heirs. |
| Joint Debts
Debts held jointly, often by spouses, can be entirely inherited by the surviving account holder. |
Medical Debt
Depending on the state, medical debt may not be inherited by family members. Instead, they could be paid by your estate. |
| Community Property State Debts
In community property states, debts incurred during marriage can be inherited by the surviving spouse, even if they were not co-signed. |
Federal Student Loans
Typically discharged upon the borrower’s death. Most Parent PLUS loans are also discharged upon the death of the student or parent borrower. |
| Unsecured Loans
Other unsecured debts, like some payday loans, are only inherited if there is a co-signer or joint account holder. |
Additional points
Based on the above chart, let’s go through some of the most common questions about deaths and debts:
1. Am I responsible for my spouse’s medical debt?
In addition to the note above, you could be responsible for your spouse’s medical debt if you’re a co-signer.
2. What happens to your credit card debt when you die?
Since credit card debt is unsecured debt, either your estate will pay it off, or your co-signer will have to handle it.
3. What happens to your student loan debt when you die?
This depends on whether it’s private or federal. For federal, see the chart above.
For private, it is entirely up to the creditor. This means that there could be a death discharge, or the money could be taken from the estate. Always ask your lender what happens to your debt when you die to stay informed.
Protecting your loved ones
So now that you know more about what happens to your debt when you die, make sure to take the right precautions for you and your loved ones.
Do you need to figure out what bills or loans to sort out? Find out by collecting the correct documents from your creditors or lenders. With the help of financial and legal professionals, ensure this process is smooth from start to finish.
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Disclaimer: The information provided in this article is for general informational purposes only and is not intended as legal, financial, or professional advice. Clarity Debt Resolution Inc. (“Clarity”) does not guarantee any specific outcomes, and results may vary based on individual circumstances. Clarity complies with all applicable laws, including the California Debt Settlement Services Act, and recommends consulting with an attorney or financial advisor before making any financial decisions. Clarity is not responsible for the accuracy of external links or content, and all website content is protected by copyright laws. We reserve the right to update or remove content at any time without notice.
