What happens to your debt when you die if you have no estate

Owing money on outstanding debt can cause a wide range of problems for us while we’re alive, especially if you allow it to snowball to the point where it’s out of control. Whether it’s debt from a mortgage loan that isn’t paid off, personal loans that are in default, a car loan with outstanding payments, or credit card bills that are well overdue, debt can be a serious issue to contend with. But what happens to that debt when we die?

The good news is that most of your debt is passed onto your estate, rather than your heirs, after you’re gone, which means that the money for what you owe is likely to be taken from your estate rather than your loved ones’ wallets. However, the rules for a deceased person’s debt can be complex. For example, not all belongings in an estate can be seized by debt collectors, but if you pass away without a will, it may keep the assets in your estate from being passed down to the beneficiaries. That’s why, if you have debt, it may be smart to fully understand how it will be settled once you are gone.

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Key takeaways

• Most debt will be settled by your estate after you die.
• In many cases, the assets in your estate can be taken to pay off outstanding debt.
• Federal student loans are among the only types of debt to be commonly forgiven at death.

Who is responsible for your debt after you die?

If you have children or a surviving spouse, you may be worried about what will become of your debt after you die, which is a legitimate concern. In some situations, the surviving spouse might be responsible for debt left behind by the deceased person.

Depending on their relationship to you and your debt, certain individuals could inherit your debt, even if they are not related to you. These individuals are:

• Spouses: Some states require community property to be put toward debt when a spouse dies. These states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, South Dakota, Tennessee, Texas, Washington and Wisconsin. Alaska & Oklahoma also have elective provisions for communal property if agreement was signed before or during marriage.
• Joint account holders: If you opened up a bank account with another person, that person would be responsible for any debts associated with that account.
• Co-signers: If you take out a loan for a business, house or car with another person, he or she would still be responsible for any payments after you pass away.
• Estate executors (in certain situations): Although executors are generally not personally liable for an estate’s debt, they can be held responsible if they are careless in their management of the estate’s assets or fail to pay the estate’s debts before allocating assets to the beneficiaries.

What types of debts can be inherited?

As stated, some debts can be inherited, but it depends on a few factors and what kind of debt it is.

Medical bills

Each state has different rules on how medical debt is handled after you die. However, medical debt is usually the first debt to be settled by an estate. If you receive Medicaid after turning 55, your state will likely make a claim on your house to recoup any payments you received. Because there are a lot of nuances with medical debt, you should consult an attorney to understand how your debt will be settled when you die.

Car loans

A car loan is a type of secured debt, which, in this case, means the loan itself is secured by the actual car. If you are still making car payments when you die, unless someone chooses to continue making payments after your estate has cleared away your debts, the car will be repossessed.

Credit card debt

Credit card debt is unsecured debt, meaning you do not need to secure it with your house or car to open one. When you die, it is the responsibility of your estate to take care of any remaining debt. If your estate is not able to do so, the credit card company is out of luck.

The only time someone else is responsible for your credit card debt is if they are a joint account holder with you. Do not confuse this with an authorized user. Many parents make their children authorized users on their account, but this is not the same as a joint account holder.

A joint account holder opened the account with you and so is deemed to be just as responsible for the debt. This is why a joint account holder is expected to continue payments.

Mortgage

As with auto loans, a mortgage is a debt type that is secured by the object it was used to purchase, which is the home itself. When you die, your estate will be used to pay off any remaining balance if you didn’t co-sign the loan.

If you leave the home to someone else, and your estate is not able to cover the remaining balance, that person will be responsible for all future payments. If there is a joint owner of the home and that person did not co-sign the mortgage with you, they will need to either sell the home and pay the balance off or continue payments to prevent the home from being foreclosed on.

Student loans

Student loans are unsecured debt, which means that if your estate cannot pay off any remaining student loan payments, the lender is out of luck. As with every other type of debt on this list, if you co-signed the loan with someone else then the co-signer will need to take ownership of your debt. If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, South Dakota, Tennessee, Texas, Washington or Wisconsin), your spouse is responsible for the debt.

Federal student loans are generally forgiven upon the borrower’s death. Some private student loans are also forgiven upon the borrower’s death (Sallie Mae and Wells Fargo, for example).

Can items be taken to pay debts?

Creditors have access to most items listed in your estate, but there are a few things that they do not have access to. Assets that may be used to pay off debt could include:

• Real estate
• Vehicles
• Securities
• Jewelry
• Antiques
• Family heirlooms

What cannot be taken to pay off debt includes life insurance benefits, retirement accounts and living or irrevocable trusts. With so many assets that can be seized, it’s important to keep track of what you own and what you still owe. With careful planning, you can protect and preserve much of your estate to be handed down to your beneficiaries.

For example, you might use an irrevocable trust to protect your assets and potentially lower your estate taxes. Assets that are placed in these trusts no longer belong to you once the trust document is filed. Be aware, though, that the assets placed in these trusts cannot be moved back into your name once the trust is in place.

Protecting your heirs with life insurance

In the event of your sudden demise, your life insurance policy could become your family’s biggest source of financial support, especially when everything else is taken away by creditors. Life insurance, much like other payable-on-death benefits, is safe from creditors and the money belongs to your beneficiaries. Even in the absence of sufficient assets in the estate to pay off debt, the life insurance benefit cannot be used for the purpose by creditors. Your beneficiaries, however, can choose to use the money as they wish, and if the benefit is big enough, it may be used to pay off a mortgage or other loans. The money from life insurance also ensures that your family can continue living in the house after your demise and carry on with normal life.

When searching for a life insurance policy, it may be helpful to shop around and get quotes from multiple providers. Doing this makes it easier to get a sense of what coverage options are available, what the associated costs may be and what policy might work best for you. It may also be beneficial to get quotes and weigh options from some of the best life insurance companies to find out which companies offer the most competitive rates and policies.

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