You might have thought about what will happen to your assets upon your death, especially if you’ve done the all-important estate planning. Have you thought about what will happen to your debts when you die? Generally, your debt is not passed on to your family members, but there are exceptions. Don’t just assume your debt’s cleared when you’re dead. Read on to find out what happens to your mortgage, credit card debt, student loans, and more when you’re gone.
What Happens to Your Debt When You Die
Laws regarding debt after death can vary by state, so it’s always wise to talk to a lawyer in your state. But normally, upon your death your debts are paid off from your estate in equal amounts until they are fully discharged or until the money runs out. Your estate includes the property you own including personal possessions, which can be sold off to pay down debts. Your estate does not include things like life insurance policies, pension plans, 401Ks, and the like. The money from those assets will pass to the named beneficiaries undisturbed.
If your debts are fully discharged, then the remains will be distributed as dictated by your will or by state law. If the money runs out before your debts are fully discharged, then some of your debts may be wiped clean, while others will be passed on to your surviving family members.
Debt That’s Forgiven and Debt That’s Passed On
Most debts in your name only will be discharged. (This is true if you do not live in a community property state. If you do live in a community property state, read below.) Debts in your name only that will be forgiven include:
- Federal student loans
- Credit card debt
- Car loans
- Many medical bills
Debts for which you have a cosigner – a mortgage, or a joint credit card, for example – become the responsibility of the person who cosigned. Other debts that still must be paid upon your death include:
- Many private student loans (read your policy)
- Taxes owed to the government
Exceptions
In community property states – Alaska (optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin – much of the above doesn’t apply. In these states, spouses share assets and debts, so a surviving spouse in one of these states may be responsible for paying off debts that would be forgiven in other states, like private student loans and credit card debt.
If you leave someone a house, car, or other piece of property that needs to be paid off, they will assume the debt as well as the property, as long as the value of the item is worth more than what is owed on it.
What To Do
You probably don’t want your death to cause an unwelcome financial situation for your loved ones. Here are a few things you can do to hopefully avoid that situation.
- First, check your credit cards, student loan policies, and other debt documentation so you know what you’re dealing with.
- Make sure your beneficiaries are up-to-date on all your policies.
- Get term life insurance to cover the amount of your debts that you know won’t be forgiven upon your death, and make the beneficiary the one who would become responsible for your debts.
- Get a will or make sure the one you have is current.
Finally, in addition to talking to a lawyer, you might want to talk to a financial adviser as well.
