What Happens to Your Debt When You Die?
Most people try their hardest to pay off debts and accrue savings throughout their lives in order to leave behind something for their loved ones. Unfortunately, our best-laid plans don’t always work out perfectly. Debt is widespread in the US with the average household carrying about $130,000 in debt and one in five people convinced they’ll die before they manage to pay off the debt they have.
So what happens if you don’t pay off that debt before you die? Will your family be saddled with that mortgage and credit card debt you’ve been trying to dig yourself out from under for years? The answer to that is (perhaps predictably) complicated.
The Probate Process
The probate process is our country’s way of trying to ensure that families don’t end up stuck with the debt of a recently deceased loved one. Probate can seem like a pain for many families – it means that any property and assets a person leaves behind for their loved ones won’t be released to them until after the estate undergoes a lengthy court process. But for many families, it can help ease the pressures of debts that have gone unpaid in your loved one’s life.
The Basics of Probate
When a person passes, their will and assets fall under the responsibility of an executor tasked with getting everything into order. Their job is to do a thorough analysis of everything included in the deceased’s estate, make sure as many debts as possible are paid off, and then distribute what’s left over to the appropriate beneficiaries in the will.
It’s often a big job that takes some time, so beneficiaries may not know what’s coming to them (if anything) until some months after the deceased’s death. The good news is that all debts become the responsibility of the estate. The bad news is that anything your loved one had – their savings accounts, home, family heirlooms, etc. – all become a part of the estate and may be levied to cover those costs.
Types of Debt Covered in Probate
There’s a hierarchy to how the probate court addresses debt. At the top of the hierarchy are funeral expenses, taxes owed, and secured debts like mortgages. All of these are considered priority and paid off first with the money included in the estate, and then with the money made by selling off any property needed to make up the difference.
If a family member inherits a home or vehicle that isn’t entirely paid off, they can usually hang onto that property simply by continuing to make payments. Lenders aren’t usually too quick to force people out, although if your loved one had a home-equity loan, they may demand that you pay off the full amount immediately, which for most people means they’re forced to sell.
Next in the hierarchy come unsecured debts, which typically means credit cards, but can also include student loans. If there’s enough in the estate to cover them, then the executor is obligated to do so. If not, the lenders are out of luck.
Exceptions to Probate
The estate will take over the vast majority of the types of wealth and assets a person has in order to complete the probate process. There are a few exceptions to what gets covered in probate court though.
If you bought a house with your spouse and you were both co-owners, the debt is still considered yours under the law when your spouse passes. Your house won’t become a part of the estate, since one of the owners is still living. While you can’t inherit any debt that’s solely in the name of your loved one, you will inherit full responsibility for any debts you co-signed on.
If your loved one named a beneficiary on their individual retirement plan or 401k, those will go straight to the beneficiary rather than becoming a part of the estate. In rare cases, the government can still go after some of that money to pay off taxes that are owed, but usually that money belongs to the beneficiary free and clear.
The same thing goes for life insurance policies. If your loved one took out a life insurance policy to help make sure your family is covered, the money becomes yours upon their death, without getting tied up in the probate process and potentially going toward their debts.
The Exception to the Exception: Community Property States
The law on what’s covered by probate varies from state to state. Depending on where you live, some types of debt that are typically considered the estate’s responsibility will fall on the shoulders of family members if the state determines that they were undertaken for the benefit of the family. If you live in a community property state and your loved one took out a mortgage on a home for the whole family to live in, for example, the mortgage may become your responsibility even if it’s only in their name.
There are currently 10 community property states, so know that the rules for you are a bit different if you live in one of the following:
- New Mexico
The Good News: Forgiveness is Possible!
Those who have toiled for years trying to get out from under debt can rest assured that their hard work may finally pay off…after they die. If a person’s estate can’t cover all the debt with the assets and property included in probate, then the creditors can’t legally force that debt on anyone else.
The lenders just have to take the hit and move on.
In this scenario, the family will lose out on anything they may have hoped to inherit, but at least they won’t have to worry about those big, lingering credit card bills.
Warning: Don’t Be Conned
As you may expect, creditors won’t be happy if your loved one’s debts aren’t paid off and they will do anything in their power to try to get that money back. There’s a good chance they’ll still try to hassle you and insist you morally owe them that money.
This is one of the rare moments in the financial world where the power they have is limited. They’re not allowed to tell you that repayment is required, but they can still bug you. If you find that any lenders are being especially persistent and aggressive in their attempts to convince you to pay, or if they try to tell you repayment is required, you can submit a complaint to the Consumer Financial Protection Bureau.
The short answer to our initial question is: No, in most cases your family won’t have to take on the debts you don’t manage to pay off. If you do have a lot of outstanding debt when you die, they will have to give up some (if not all) of the property they may have expected to come their way in the inheritance. For many people, losing out on some stuff, even if sentimental, will seem preferable to being stuck with someone else’s debt.
Even so, the ideal is to leave them with something. Obviously if you can manage to pay off all your debts in life, do so in order to leave your family that much better off. If it’s just not possible though, you can at least rest assured that your debt is one thing they won’t have to worry about once you’re gone.