After your death, your estate will pay off your debts. In general, your family is not responsible for paying off your debts unless they have co-signed loans or jointly own one of your accounts.
Note: Laws regarding post-death debt vary by state. The following information is provided for general information rather than legal advice. Please contact an attorney who specializes in estate and estate planning for details on your specific situation.
It's bothersome enough to be burdened with debt all your life, but what happens to your debt when you die? With an average American debt greater than $ 90,000, it's important to understand what happens to the money you owe after you die.
Debt does not go away after you die, so the assets of your estate will be used to pay off the creditors you owe. Fortunately, your family is usually not on the hook for your debts, although there are exceptions for co-signed loans or joint accounts.
Read on for details on how to pay off debts in the event of your death, including information about specific types of debt and "common goods" where spouses are responsible for each other's debts.
How debts are paid after death
Paying off your debts after death is part of a larger legal and financial process. After your death, your property will be treated according to the plans set out in a will or trust.
In the case of a will, the assets are dealt with through legal “probate”. In general, this means that your will will be proven valid in court by an executor. This is the trustworthy person you choose to handle your property when you die. With a valid will, the courts begin to determine the value of your “estate,” which is simply all you have upon death.
In the case of a trust, your assets will also be accounted for and divided among the beneficiaries, but the probate procedure is not required.
The money in your estate will be used to pay off your debts before the remaining assets are given to your spouse or children. When your net worth is negative, meaning you owe more than you own, the creditors determine the priority for payment. Then the remaining debts will be forgiven – unless you are married in a "jointly owned" state, which we explain below.
Does your family have to pay their debts after you die?
In most cases, your family is not responsible for your debts after you die. If your estate does not have enough cash to pay off your remaining debts, the balance will simply be forgiven and creditors will be out of luck.
However, there are several situations in which your family would have to pay their debts:
Common accounts: If you share an account with a family member, all debts in the account are their responsibility. (Note, however, that this usually does not apply to authorized users.)
Co-signed loans: When your family members sign a loan with you, they agree to an equal payment responsibility so that they must repay the loan even if you die.
In "common property" it says: Several states consider all assets and debts acquired during marriage as "common property". So if one spouse dies, the other is responsible for their debts.
Certain situations can be very different. Therefore, you should consult a probate or probate attorney in your state for specific recommendations about your estate.
While the states of "common property" differ in the implementation of the succession law, everyone agrees that the debts incurred during the marriage belong to both partners, regardless of who signed it. It is important that debts acquired prior to marriage are not considered to be shared between spouses in any state.
Below is a map detailing the states that currently have community property laws.
Understanding your state's status in terms of shared debt is helpful in making financial decisions that may affect your spouse after your death. And because of the complexity of the probate process, it can be helpful to take a look at how certain types of debt are handled after death.
How Different Types of Debt Are Treated When You Die
While the money from your estate will always be used to pay off your debts after your death, it can be helpful to have a detailed understanding of how to deal with certain types of debt.
How certain debts are handled after death
Type of debt
Medical bills are usually paid first during the inheritance process, so other debts may not be paid at all if the inheritance is insufficient.
If your home is not paid for and there is no co-signer, your heirs will need to refinance the loan on their own behalf. Otherwise the house will be sealed off.
Cars, like houses, are the responsibility of all co-signers. If the car is not paid off and there is no co-signer, the loan servicer can repossess the vehicle.
If you have shared lines of credit, the other account holder is responsible for making the payment. Otherwise, the debt will be paid from your estate.
Federal student loans are granted after death, but someone needs to contact the loan servicer. Private student loans must be paid for from your estate.
Of course, there are many other types of debt. You should therefore consult a real estate attorney to come up with concrete plans for your financial future. Generally, the debt will be paid from your estate in a common law state or by your surviving spouse in a jointly owned state.
No matter how much financial planning you've done, having a plan to get out of debt is a wonderful way to improve the quality of your life now and increase the wealth that you can leave your family behind when you are away. Start by creating a budget. This is a great first step to a newfound sense of financial control.
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