What Happens to Your Debt When You Die?

True or False: Your spouse must assume your personal credit card debt after you die.

If you guessed FALSE, you’re right!

Many spouses live in fear and worry 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 debt may not be passed on after you die—unless they have cosigned or jointly own an asset which is used to back a loan, your debts are not automatically passed to your loved ones when you pass away.

You loved ones don’t always assume your debts when you die. But beware, many debt collectors will try to pressure you and tell you otherwise in an attempt to collect the funds.

You Might Not Pass Debt to Your Heirs

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

Your loved ones will not have to pay for your debts when you die unless they are a co-signer or a joint owner in an asset being used as collateral for a debt. They will not have to personally settle your debts with the lenders.

James M. Sullivan, an attorney in Charleston, South Carolina with the law firm 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 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 executors or personal representatives of their spouse’s or loved one’s estate. The estate, which is the legal definition of all the stuff one owns at the time of death, has to pay off all of the deceased person’s debts with the estate’s assets.

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

It is important to understand the estate and its executor—NOT the family member—are responsible for clearing up the debt when ones dies with assets in an estate. While those individuals may be one and 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, associates 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 you can 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 this 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 may struggle with understanding exactly who owes what because the debt and assets were owned jointly.

For example, if you and your spouse jointly owned a car which still had a car loan on it, they would assume the entire amount of the loan when you die.

In this case, because it was owner transferred, the asset and its associated debt would be transferred fully to your spouse. The surviving spouse, of course, would have the option to sell the car to satisfy the debt.

This is also true of most assets; you can sell them to satisfy the debt. This applies to homes, as well—your spouse would assume complete control of a jointly owned home.

Federal law prohibits your home mortgage lender from pursuing the complete mortgage after one spouse has died.

If the title of your home is held jointly with rights of survivorship, your half of the home will automatically transfer to your spouse at your death. Even though they are now responsible for the entire mortgage, the home will now be entirely theirs.

When it comes to timeshares, they function very similarly to homes in terms of ownership.

But, your loved ones may be able to get out of the timeshare contract after you have passed away.

One such timeshare owner, Marsha Goodman, of New Jersey, states when her husband passed away, she was able to get out of the timeshare contract by writing to the resort in Mexico, explaining that it would be too burdensome.

Check out our review of the Newton Group—a company who helps you get out of timeshares.

Assets Creditors Cannot Touch

There are several assets your creditors cannot touch.

Items such as:

• your 401(k) retirement account
• 403(b) accounts
• IRAs
• Roth IRAs
• investment brokerage and mutual fund accounts
• life insurance policies

Typically, these 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 designate where your assets go after your death, first, instead of going through probate court.

These assets go straight to the beneficiary you name, called bypassing probate.

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 which are never repaid by an estate which is insolvent.

Life insurance can help pay off the debts of your estate and even leave an inheritance.

Tips for What to Do Before You Die

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

• Make a list of all your accounts, assets, and debts. It will pay dividends to have all that information ready for your executor.
• Update the beneficiaries to all of your accounts, retirement accounts, and insurance policies. This is something you should check on every couple years, or even annually as you get older, to ensure assets end up in the right place.
• Make more of your assets joint with rights to survivorship so they pass right to your spouse or heirs without probate. If you’ve ever been divorced, this is something you’ll want to double check on.
• Make a list of your online accounts, username, and passwords and keeping it where your executor can find it. This will allow a beneficiary to deactivate the accounts and handle any last items. Think about sites like Facebook, Twitter, PayPal, eBay, etc.
• Relinquish rights of things like timeshares back to the resort or exit out. You will absorb all the costs now but your loved ones won’t be tasked with these on top of other obligations.

Related: Will Your Small Business Survive Your Death

In almost every case, your personal debt will die with you when you pass on. Debt dies with the borrower. A debt isn’t always passed on to your children or spouses.

But, there are several things 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?