If you don’t care what happens to family members, go ahead and die in debt. However, if you do, then you’ll want to understand what happens when you pass away, and your debt lives on.
Studies show that Americans are dying with an average of $62,000 in debt. That’s not small change. Who ends up paying that debt when you are gone? Or does it vanish mysteriously?
Fox Business recently published an article that asks “What Happens to Your Debt When You Die?” As the article explains, the answer depends on a few different factors, including the type of debt, whether there was a cosigner and the value of the deceased person's estate. Let’s look at some possible outcomes:
In many cases, any debt you owe during your lifetime will have to be paid by your estate when you pass away. Creditors can make claims against your estate during the probate process. If you died with a will and named an executor, he or she will usually use the assets you left behind to pay off your debt. If you don't have enough assets, creditors are typically without recourse, if you had unsecured debt without a cosigner. However, if you had a secured loan, like a mortgage or a car loan, the debt would need to be paid for your family to keep the asset. For instance, if you leave your home to your family, they'd have to pay your mortgage to keep the house.
Creditor claims take precedence over your instructions as to what happens to your assets. If you stated in your will that your bank account is to pass to your children, but you owed money to a creditor, the money in the bank would first be used to pay the creditor, before your children could inherit.
If your estate doesn't have enough assets to satisfy your debts, creditors may seek the payment from any cosigners on the loans. Cosigners share legal responsibility for debt and will be held 100% responsible for paying the remaining balance.
One potential exception to this general rule is for certain types of student loans. For example, a Parent PLUS loan can be dischargeable due to a student's death, and some private student loans offer a death discharge. However, it is rare. If the primary borrower on student loan debt dies, the surviving cosigner should read the loan terms to determine if he'll still be held responsible for paying it. Federal student loan debt is typically forgiven, when the borrower dies.
Creditors can also attempt to collect from co-borrowers, if you had a joint account. Therefore, if you and your spouse had a mortgage together or shared a credit card, your spouse would be expected to continue paying the bills after your death.
However, if there's no cosigner and not enough assets in the estate to pay the bills, creditors will charge off the debt because there's no way to collect. Beware that creditors may attempt to guilt family members into paying after their deceased loved one's death. However, generally there’s no requirement that you pay debt that belonged to a loved one. An exception is in states with community property laws that require spouses to pay off debt belonging to a deceased spouse using community property.
In a perfect world, we would all tidy up our affairs before dying and no one would be faced with hounding creditors or scary notices from banks or government agencies. However, if you have these kinds of debts, or if a family member has passed away and you are involved in their less than stellar finances, speak with an estate planning attorney.
Reference: Fox Business (December 27, 2018) “What Happens to Your Debt When You Die?”