What Happens to Your Debt When You Die?

What Happens to Your Debt When You Die?

Will your debt haunt your family after you’re in the grave?

True or false: You assume your spouse’s credit card debt after they die?

FALSE! Many spouses are living in fear and worry that they will be saddled with the burden of additional debt when their loved one dies.

Adult children are also finding themselves concerned about their parents’ finances as well.

The good news is that debt cannot be passed on after you die. Your loved one’s problems are not automatically your own when they are gone. You don’t assume your spouse’s or parents’ debts and financial disasters even though many debt collectors will try to pressure you and tell you otherwise in an attempt to collect the funds.

Your credit card debt, home loans, student loans, car notes, and other debts cannot be bequeathed in most instances like your stamp collection. In many cases, the lender will get stuck holding the bills while the debt dies with the borrower.

You Can’t Pass On Debt To Your Heirs

Assuming that you are not a co-signer on your loved one’s debt or assuming that you do not own joint property that is collateral for a loan that it is attached to, you will not have to pay for your loved one’s debts when they die. You will not have to personally settle their debts with their lenders.

James M. Sullivan, an attorney in Charleston, SC with David and Sullivan LLC said,

“An estate generally is responsible for paying the submitted debts of the deceased. In South Carolina, as well as most states, creditors are required to submit claims against an estate.”

Typically, claims for debts owed must be submitted in a certain period of time to the estate. The time limit on filing a claim against an estate is around eight months in South Carolina, for example, says Sullivan.

He added that the administrator or personal representative, which is also known as the executor, has the right to challenge the claims before probate court if there is a question as to whether the debt is legitimate and actually owed or not says Sullivan.

Loved Ones As Executors Can Get Confusing

Now, here is where a lot of people tend to get confused. Many spouses or adult children are the executor or personal representative of their spouse’s or loved one’s estate. The estate, which is the legal definition of all the stuff you own at the time of your death, has to pay off all of the deceased’s debts with their assets.

The estate pays the debts and not their children or surviving spouse. But, sometimes the executor and surviving family member is one and the same.

It is important to understand that the estate and its executor–NOT the family member–are responsible for clearing up the debt when you die. While the people may be one at the same, their roles and responsibilities are drastically different.

Your Estate Pays Your Debts

When you die, all of your assets become your estate. My wife laughed when I told her that one time. She, like many people, associate estates with the rich and famous who have an enormous amount of assets to divide amongst their heirs.

But, almost everyone has an estate. Many people leave checking accounts, cars, homes, and a host of other assets for others after they die. These assets are your estate which is managed by an executor which you name in your last will and testament.

An estate’s executor who is also a spouse or child of the deceased can find it confusing, though, which is understandable. There is an inevitable blending of roles and responsibilities in that case.

The executor has the responsibility to settle valid debts and claims and distribute assets to heirs, as well as file tax returns, Social Security and any veteran’s benefits, and life insurance claims (if applicable), along with a host of other duties.

What About Jointly Owned Assets?

A spouse who is executor may struggle with understanding exactly what the deceased’s estate’s debt is and what is now his or her debt completely because the debt and asset was owned jointly. For example, if you and your husband jointly owned a car which still had a car loan on it, you would assume the entire amount of the loan when your spouse died.

In that case, because it was owned jointly, the asset and its associated debt would be transfered fully to you. You, of course, would have the option to sell the car to satisfy the debt. This is also true of most assets. You can sell it to satisfy the debt.

This applies to homes, as well; you would assume complete control of a jointly owned home. Federal law prohibits your home mortgage lender from calling due the complete mortgage after one spouse has died.

If the title of your home is held jointly with rights of survivorship, the half of the home that your deceased spouse owned will automatically transfer to you at his or her death. Even though you are now responsible for the entire mortgage, the home will now be entirely yours.

Assets Creditors Cannot Touch

There are several assets that your creditors cannot touch. Items such as your 401(k) retirement account, 403(b) accounts, Roth IRAs, investment brokerage and mutual fund accounts, and most life insurance policies cannot be touched by lenders to pay for your debts when you die.

These types of accounts typically have designated beneficiaries where you file forms which designates where your assets go after your death instead of going through probate court. These assets go straight to the beneficiary that you name.

What If Your Estate Is Insolvent?

What if you die and your estate is not worth enough to cover your debts? In this case, your estate is considered insolvent, and your creditors are typically out of luck. If you have more debts than assets at the time of your death, your lenders will only receive a portion of your assets, if any, when you die.

Your executor will have to liquidate what remains of your assets to pay off as many of your debts as he or she can. The debts that remain after all the assets, cash, investments, etc. have been liquidated will simply die with you. There will be some debts that are never repaid by an estate that is insolvent.

Tips For What To Do Before You Die

There are a few things that you can do to make life easier for your family, friends, and estate executor before you die.

  • You should make a list of all your accounts, assets, and debts. It will pay dividends to have all that information ready for your executor and save time and energy after you’re gone.
  • It is also important to update the beneficiaries to all of your accounts, retirement accounts, and insurance policies.
  • In order to avoid probate court, you may want to consider making more of your assets joint with rights to survivorship so they pass right to your spouse or heirs without probate.
  • Now more than ever before, it is important to have a listing of your online accounts, username, and passwords where your executor can easily find and then deactivate accounts and collect final payments, if applicable, from websites like Facebook, Twitter, Paypal, eBay, and the many others that you may have a membership.

In almost every case, your personal debt will die with you when you pass on. Debt dies with the borrower. A debt cannot be passed on to your children or spouses. But, there are several things that you can do to prepare you and your family as best you can for your ultimate passing.

If there are specific questions you have regarding outstanding debts of a loved one who is near death or who has recently died, you should seek out legal counsel from an attorney in your state or the state your loved one’s estate resides in. The advice above is only topical and does not pertain to all situations and to all state laws regarding estate administration.

Are you prepared to take care of your loved one’s estate? Are you an executor and an heir? Have you been harassed by debt collectors trying to get you to assume a dead relatives’ debt? What other tips should people facing this difficulty consider?



Last Edited: May 9, 2013 @ 10:53 am
About Hank Coleman

Hank Coleman is a fan of everything personal finance. He's the creator of the popular site Money Q&A, as well as other financial sites. Hank is currently studying to become a CFP. His freelance writing work can be seen across a variety of top-notch publications in finance and investing.

Comments

  1. Your spouse may not assume the your debt if you die, but if you combine your finances in your marriage (which I believe to be a good thing to do), then your assets will stand good for the debt of your spouse.  So essentially you will assume the debt if your combined assets exceeds your debt.

  2. Nice overview.  Hopefully I don’t have any debt when I die or if I do that my assets more than cover the debt.  It’s kind of sad to think that there are people who die owing more than they have, but I’m sure it’s relatively common.

    • Hank Coleman says:

      CommonCentsWealth With car notes, home mortgages, credit card debt, student loan debt, and America’s abysmal savings rates, it may be more common than we all realize.

  3. Thanks, this helped clarify a lot of those ‘back-of-the-mind’ questions.
    I wasn’t aware hat you could have beneficiaries to a 401k, interesting…