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What Happens to Debt When You Die?

·7 min read

As the old saying goes, you can't take it with you. That's not necessarily a bad thing. If there is a good place somewhere up there, who would want to take credit card debt and medical bills with them?

Still, the question of what happens to debt when you die begs other questions: Who gets stuck with the bill? And what happens if no one can pay your debts?

This certainly isn't the most pleasant topic, but we do have some answers to these and other questions.

[Read: What Happens if You Don't Pay Your Debts?]

Who Is Responsible for Your Debt When You Die?

As you can imagine, it's complicated. "As a general rule, it is the estate of the deceased person that is liable for his debts," says David Clark, attorney and partner at the Clark Law Office in Okemos, Michigan.

This means your spouse, if his or her name isn't on the debt, is technically in the clear. So are your children. But, of course, if your spouse or children stand to inherit the assets in the estate, and the estate first has to pay off debts, the assets will be fewer.

So your debts won't instantly disappear.

As for who is the one in charge of paying off those debts, Clark says, "The existence of a will allows a named executor or administrator to manage the finances of the estate. When a person dies intestate or without a will, the estate goes into probate and the court appoints an administrator who will distribute the estate's assets according to state laws."

Will Creditors Go After My Family if I Owe Debts?

They shouldn't, but they might have some uncomfortable conversations, and legally, they may be able to.

"Children are not liable for the personal debts of the deceased," Clark says. "However, the Fair Debt Collection Practices Act allows collectors to discuss such debts with the deceased person's family."

Furthermore, some debt collectors may test the boundaries of what's ethical and what's not.

Natalia Lucci, a marketing manager in Fort Lauderdale, Florida, says creditors have been hounding her and her husband since her 74-year-old father died of COVID-19 in September 2020.

Like plenty of Americans, Lucci's dad was overextended. He died owing $16,000, spread over four credit cards, and he had some dental billing collectors after him for dental work he wasn't able to pay off. He also had a car that was still being paid off.

"That was an easy fix," Lucci says. "They just took the vehicle back."

Lucci says she was able to get a few companies to finally back off after providing them with his death certificate. "But even then, some collectors didn't give up. We have even received threats of jail time if we didn't pay up," Lucci says.

Those threats were empty threats, as Lucci was well aware, calling it "more of an annoyance than anything."

Consumers may get some relief from out-of-bounds debt collectors by reporting them to their state's attorney general's office or the Federal Trade Commission at FTC.gov or by calling 877-FTC-HELP.

[Read: How to Negotiate With Debt Collectors.]

Are There Debts That Are Inherited and Debts That Are Not?

In a nutshell, no debts can be inherited. But again, if your family is inheriting an estate, or part of one, the estate may have to pay off what it owes before it can disperse funds to family members.

Still, the estate may not have to pay off everything. Here's how things generally break down.

Mortgages

The bank will not be left high and dry. One way or another, it will either get the mortgage paid off -- or get the property. "A mortgage is a secured loan so if the estate does not make arrangements to sell or otherwise handle the debt, a creditor will foreclose on the property the same way it would have if the debtor was still alive," says Jeremy Heck, a debt relief attorney at Luftman, Heck & Associates, headquartered in Columbus, Ohio.

Car Loans

Car loans are handled similarly. "A creditor will almost certainly repossess the car if the debt is not handled through probate," Heck says.

Medical Bills

If you die leaving medical debt behind, in general your children won't be responsible but your spouse may, according to Heck. "This is possible because of a specific revised code that allows medical providers to hold them responsible," he says.

Credit Card Debt

Credit card payments that are overdue are considered unsecured debt, Heck says. "A creditor may pursue a credit card action against the estate, but these types of claims are uncommon," he says. "What happens more frequently is that a creditor writes off this debt if it's not repaid through the administration of the estate."

Student Loans

Generally, federal student loans will be forgiven if a family member applies to have them forgiven and produces a death certificate. With private student loans, it depends on the policy, but the odds of them being discharged are good -- unless a family member co-signed the student loans.

What Can Be Taken From the Family to Repay Debts?

Again, it comes down to the estate.

If you have a house, a car and credit card debt when you die, and your family still lives in the house, the monthly mortgage obviously needs to be paid one way or another. If the mortgage payments don't continue, the house could be foreclosed. Similarly the car could be repossessed if car payments don't continue.

If you leave behind credit card debt, however, and your spouse or children didn't co-sign on the credit cards, you're in a gray area. If you leave money behind, and you have someone handling your affairs, it may end up going to the credit cards or the hospital you owe money to. But if you don't leave money behind and you owe money, chances are your family will not have to pay, says Michael Sullivan, a personal financial consultant at Take Charge America, a national nonprofit credit counseling and debt management agency headquartered in Phoenix.

"With a few exceptions, creditors cannot collect from survivors," Sullivan says. "The major exceptions are for co-signers on accounts and joint account holders. People who have signed agreements making them responsible can be held responsible for that debt. And in some states, there are community property laws that make a spouse responsible for some debts. People losing a spouse in community property states should consult with an attorney."

Can Life Insurance Protect My Family?

Yes. There are too many tragic tales of breadwinners who didn't take out life insurance and families that struggled financially. So if you support any family members, you should consider getting life insurance.

Since we're on the topic of debts, the insurance money you leave for your family does not have to go toward debts. Your life insurance payout goes to your beneficiaries, who get to decide what to do with the money, and they may well want to use the payout to pay off any debts left behind. For instance, if your family still lives in the house, they'll probably want to pay off the mortgage and any car loans.

On the other hand, if you left behind a significant amount of credit card debt, as long as they aren't co-signers, technically, your debt isn't their responsibility.

But in general, people get life insurance so that their family will have enough money to pay off crucial debts, like a mortgage, and have funds for things like paying for college, paying the bills and buying food.

[See: Money Moves You Will Be Thankful For.]

Which Debts Are Forgiven When You Die?

In the technical sense, no debt is forgiven -- automatically, anyway. But as a general rule, credit card debt and some types of student loans are the easiest to eventually be forgiven. Credit card companies generally have little choice but to write off an unpaid debt if family members refuse to pay, and the federal government as well as some private lenders will generally forgive a person's debt if that person has departed.

What if Your Beneficiary Dies?

What happens if you have a life insurance policy, and your beneficiary dies too? In that case, the money you leave the beneficiary would go to his or her estate, and if your beneficiary has debts, the estate could pay those out.

What Happens to Credit Card Debt When You Die?

Generally, credit card issuers -- or debt collectors -- will try to get loved ones to pay what's owed. But as debt relief attorney Jeremy Heck noted earlier, frequently credit card companies write these debts off as uncollectable.