No one likes to think or talk about passing away, even though it’s one of those inevitable realities. Yet as unpleasant and morbid as it may be, for the sake of your loved ones, it’s important to plan ahead. This includes understanding what happens to your debt when you die.
When Debt Dies With You
When you pass away, an estate is created and your debt typically becomes the responsibility of your estate. Your estate is everything that you own outright at the time of your death. This may include bank account balances, real estate, vehicles and other assets.
The executor of your estate has the job of negotiating with creditors and satisfying debts out of your estate. In some cases, the executor may need to oversee the selling off of your assets to cover outstanding debts. In the case of secured debts, like auto loans or mortgages, an asset like a car or house might be turned over to the lender to satisfy the debt.
The executor of your estate has the job of negotiating with creditors and satisfying debts out of your estate.
Once your outstanding debts are satisfied, the remainder of your estate is typically distributed according to your will or, in absence of a will, according to the probate court’s decision. Navigating through these steps can be complicated and your executor and heirs may benefit from consulting with an attorney.
In many scenarios, people die with considerably more debt than the value of their estates. Thankfully debts left over after your estate has been exhausted typically will not pass on to your family. If your estate doesn’t have enough money to satisfy your outstanding credit card debt, for example, the lender would generally write off the debt as a loss and move on because there’s nobody left to pay it, although there are exceptions.
When Debt May Live On
Although it’s not as common, there are circumstances in which your debt could potentially become your family’s burden after you die. Here are a few examples.
Your Loved One Co-Signed
If you shared a debt with someone else, the responsibility for the debt lies with your surviving co-signer. The co-signer has equal liability for the debt regardless of whether or not they have the car, live in the house or have the credit card.
Your Loved One is a Joint Account Holder on Your Credit Card Account(s)
If you opened a joint credit card with someone like your spouse, he or she will remain responsible for the debt.
You’re Married and Live in One of the Nine Community Property States
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. It’s possible that you will be responsible for your deceased spouse’s debt if you benefited from it.
Protections for Your Family
If any of the categories above apply, your loved one could potentially be liable for some of your debt after your death. Nonetheless, there are still legal protections your loved one can count on even in these circumstances.
Fair Debt Collection Practices Act (FDCPA)
The FDCPA protects you from abusive debt collection practices while you are alive. It also has protections that may extend to your loved ones after you die.
When you pass away, debt collectors are permitted to discuss your debts with your spouse, your parents (if you’re a minor), your executor or your administrator. This is true even if your loved one isn’t legally liable for the debt. However, debt collectors cannot mislead your family members into believing they are responsible for a debt when they aren’t.
Life insurance benefits and retirement accounts are often protected from creditors in the event of your death.
You can read more about what the FTC has to say about debts and deceased relatives on the agency’s website. Additionally, it’s wise to consult with an attorney to plan your estate now so that your loved ones and your assets are protected.