Have you ever wondered what happens to your debts after you die? Do they disappear, transfer to others, or settle into a form of debt purgatory? Depending on the type of debt and where you live, all of those options are possible.
Generally, your debts live on through your estate that is created after your death. The executor of your will is charged with paying off those bills using the available assets, in the order determined by law. Any assets that remain will transfer to your heirs in accordance with your will – or, if you left no will, they will be distributed according to state law.
If debts exceed assets, no money will be available to pay remaining creditors. Options for creditors at that point depend on a number of factors.
With respect to credit card debt, the first question is whether the debt was on an individual or joint account. For joint accounts, the surviving partner is responsible for paying off the debt. This is distinct from an authorized user on a credit card – authorized users are not responsible for the debt because while they were authorized to use the account, they were not responsible for paying the bills.
Individual credit card accounts are paid from the estate of the deceased. If no money is available in the estate to pay the bill, the creditors are generally out of luck and the debts will be written off. There are no assets to secure the debt, such as a home or a car.
The rules are different in community property states (Arizona, Washington, Idaho, Louisiana, California, New Mexico, Nevada, Wisconsin, and Texas, with Alaska included if spouses choose the option). In these states, it's possible for debts from a spouse's separate accounts to be passed to the surviving spouse, even if the spouse was not aware of the debts. The states vary in their interpretation and enforcement of these laws. Consult a suitable lawyer to address your specific situation.
Mortgage debt is a bit trickier. Generally, the debt transfers to whoever inherits the house. Your heirs can take over the loan at the same interest rate and payment schedule that you had. Transfer of ownership by death is exempt from clauses that allow lenders to require full payment upon transfer. However, if you have a reverse mortgage on the home and no co-borrower living in the home, the loan is due in full upon your death. Heirs must pay off the balance to retain the home.
Any home equity loans also transfer to heirs, but unlike a mortgage, lenders are able to call in the balance of a home equity loan upon transfer. In some states, if your home is the only significant asset that you have left behind, it may be sold to cover other debts that cannot be covered by other assets.
Auto loans are to be paid off by the estate. If the estate has no funds to pay off the car, the lender will simply repossess it. If the car is inherited, the lender is likely to allow whoever inherits the car to continue with the payments.
The fate of student loans depends on whether the loans are public or private. Federal student loans are discharged upon death, but private student loans are a different matter. If no money is available in the estate to pay off the loan, the lender has limited recourse – but any co-signers of student loans are still responsible for debts. In community property states, spouses may be responsible for the student loan debt as long as the debt was incurred during the marriage.
You can make life easier on your family and heirs by having an updated will that clearly outlines your wishes and clarifies potential debt burdens to the extent possible. A trust can further protect your family.
Of course, the best way for your debts not to be a burden to your loved ones is not to have any debts upon your death. You obviously will not care at that point, but your loved ones certainly will.
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