Who Is Responsible for Your Debt After Your Death?
Debt does not disappear when you die. However, that does not necessarily mean someone else will be saddled with your debt automatically. Creditors can collect what is owed from your estate. If things are in Probate and you are the appointed Executor, then you will have to resolve the debt. Similarly, if you are the successor trustee of a living trust, part of your duties will be to resolve the debts of the estate.
There are some situations when your loved ones can be responsible for paying your debts.
- If you have a co-signer on a loan or line of credit, the co-signer will be responsible for paying the debt after you die.
- Your state law might require your spouse to pay certain debts.
- If you live in a community property state, your spouse might have to use property that you owned jointly—rather than property that only was in your name—to pay your debts. Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin are common law states. Alaska has an optional community property system.
The kind of debt you have can affect whether it will have to be paid after your death. Here are how these common types of debt typically are overseen:
- Mortgage Debt
On a mortgage if there is a surviving borrower, they will be responsible for the loan. If there is no co-signer on the mortgage, no one must take on the obligation. However, that does not mean your family can inherit the property free and clear. If they want to keep the home, they will have to assume responsibility for the loan. Even if they want to sell it, family will need to continue making mortgage payments until the house is sold. The remaining mortgage debt will have to be paid off once the house is sold. If no one takes over the mortgage after you die, the bank can foreclose on the property.
2. Credit Card Debt
If you have any credit card accounts with a joint account owner, the co-owner will have to pay any balance on the account.
Be aware that a joint owner is different from an authorized user you have allowed to use your credit card. An authorized user will not be responsible for your credit card debt. If you have credit card accounts in your name only, the credit card companies can make a claim to get paid through your estate.
“If there is no estate, no will, and no assets—or not enough to satisfy these debts after death—then the debt will die with the debtor. “There is no responsibility by children or other relatives to pay the debts.”
3. Student Loan Debt
You are in luck if you have federal student loans because they will be discharged if you die. That means they will not have to be paid. Any PLUS loan your parents took out to pay for your college education also will be discharged if you die. A family member will need to provide your loan servicer with a death certificate to prove your death and have the loans discharged.
You are not so lucky if you have private student loans. “There's no official discharge of private student loans, unlike federal student loans where the debt dies with the debtor or student borrower,” If the loans are in your name only, assets from the estate can be used to pay what is owed if the lender does not discharge the debt.
If you have a co-signer for a student loan; like your parents, that person will be responsible for what is owed. In fact, some lenders include clauses in their contracts (“acceleration clause”) that require the balance to be paid immediately if a co-borrower dies.
Therefore, getting life insurance on a child who used certain types of financial aid is not only wise but could also be transferred to them later if it is permanent type of life insurance and the policy would have been taken out while they were young and healthy keeping future costs or difficulties in getting a policy out of possibilities.
4. Car Loan Debt
Your family will have a few options to manage any debt you owed on a motor vehicle:
- They could let the lender repossess the car if they do not want it.
- They could sell the car to pay off the loan.
- Or they could keep the car by continuing to pay what is owed on the loan.
5. Medical Debt
Unfortunately, medical bills do not go away when you die. The care provider or collection agency will have to decide what course of action it is going to take to recover the money. If you owe just a small amount, the provider might declare the bill noncollectable and close the account. If you owe a lot, they may try and collect what is owed from your estate or at least see if they can get you to pay the entire bill.
Medical debt is the one type of debt where there usually is not a co-owner. The patient is responsible except in situations when the patient is a child. Then the parent would be responsible for the bill