What Happens to Your Debt When You Die?

What Happens to Your Debt When You Die

True or false: Your spouse will assume your personal credit card debt after you 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. Unless they have cosigned or jointly own an asset that 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 assume your debts when you die. But beware, many debt collectors will try to pressure them and tell them otherwise in an attempt to collect the funds.

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.

You Can’t Pass On Debt to Your Heirs

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 that is 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, 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.

Related: 9 Critical Reasons You Need a Will

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 that the estate and its executor–NOT the family member–are responsible for clearing up the debt when you die with assets from your 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 that you name in your last will and testament. (If you haven’t written your last will and testament you may want to check out Trust & Will. You can create one in about 10 minutes.)

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 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 that still had a car loan on it, they would assume the entire amount of the loan when you die.

In that case, because it was owner transferred, the asset and its associated debt would be transferred fully to your spouse. They, 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 that 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 that helps you get out of timeshares.

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 that designate 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.

Life insurance can help pay off the debts of your estate and even leave an inheritance. Here’s where to find the best term life insurance online.

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.
  • 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.
  • Consider making a list of your online accounts, username, and passwords and keeping it where your executor can find it. This will allow them to deactivate the accounts and handle any last items. This about sites like Facebook, Twitter, PayPal, eBay, etc.
  • If your loved ones do not want your timeshare, you may want to relinquish it back to the resort or exit out. You will absorb all the costs now but your loved ones won’t be tasked with that 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 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.

Related: Meet Fabric, One-Stop-Shop for Life Insurance and Basic Estate Planning

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?

What Happens to Your Debt When You Die

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About Hank Coleman

Hank Coleman is the founder of Money Q&A, a CFP candidate, entrepreneur, and freelance writer. His freelance writing work can be seen at AOL Daily Finance, The Motley Fool, Five Cent Nickel, Seeking Alpha, Military.com, Fox Business, Discover Bank, GoBankingRates.com, and more.

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  1. CommonCentsWealth says

    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.

  2. freemoneyminute says

    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.