Unless you’re Wednesday Addams, your idea of a good conversation probably includes anything but the topic of what happens to your money when you die. And while that’s normally a good thing, those conversations are essential—especially when it comes to your debt. Turns out, your financial problems don’t die when you do. In fact, your family can inherit your debt. Talk about some unfinished business!
The average American has about $92,727 in total debt, including student loans, personal loans, auto loans and mortgages.1 Ouch. So, with all these debts . . . which types can be inherited? And which debts are forgiven at death?
Don’t worry, here’s everything you need to know about debt after death:
Who Is Responsible for Your Debt After Your Death?
The answer to this one is tricky . . . It depends.
As a general rule, any debt that’s in your name only (that’s key) gets paid by your estate after you die. (Your estate is simply all the assets you owned at the time of your death—like bank accounts, cars, homes, possessions, etc.)
The executor of your estate (a trusted person you pick in your will) is in charge of making sure everything is taken care of. They’ll handle your assets, give your family their inheritance, and pay off your debt, if necessary. This process is called probate.
Let’s say you had $100,000 of debt when you died, but you also had a paid-for house worth $200,000. The executor of your estate would sell the house to cover your debt, leaving $100,000 (minus any necessary fees) of inheritance to your heirs.
But what happens to your debts after your death if you don’t have any assets? If you have more debt than assets, things can get a little tricky (more on that in the Secured vs Unsecured Debts section below).
But first, let’s talk about how debt is inherited in the first place—and which types of debt can be inherited.
How Debt Is Inherited
We all know we can’t take anything with us when we die. Yep—that means cherished family heirlooms, jewelry, cars and even that signed rookie baseball card you love so much. That’s why so many people talk to their loved ones about what they might want when it’s time to pass things along. Who’s going to get grandma’s ring or grandpa’s vintage car? Pretty special, right?
Here’s what isn’t so special: leaving behind a closet full of money problems. And while most debt is paid for from your estate, there are several instances that can make someone legally responsible for your debt after you’re gone. (That’s a bad inheritance.)
Which Types of Debt Are Inheritable?
No one wants to leave debt and money problems to the people they cherish the most. That’s why it’s so important to think about these things ahead of time. Here are some surefire ways to get caught on the wrong side of leaving a good inheritance:
Cosigned Bills and Loans
To put it simply: Never cosign anything. Why? Because cosigning makes you liable for someone else’s debt. If you cosign for a friend’s loan or medical bill, you agree to make the payments if that person is no longer able to. And if they die, they’ll never be able to pay, leaving you responsible to clean up their financial mess. Save yourself and your loved ones the financial stress—do not cosign for their loans. And when it comes to taking out your own loans? Just say no.
Community Property States
“For richer or poorer” takes on a whole new meaning for married couples in the nine states with community property laws (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). In these states, the surviving spouse is legally responsible for any debt the deceased took on during their marriage (including private student loans), whether the spouse agreed to it or not. Pretty terrifying, right? All the more reason to work together as a couple to pay off your debt—as soon as possible.
Filial Responsibility Laws
Almost 30 states have filial responsibility laws, meaning they require children to cover their deceased parents’ long-term care costs, such as nursing home or hospital bills. These are rarely enforced, but you don’t want to risk being unprepared if you find yourself in this situation.
This one may surprise you, but since most timeshare contracts include a “perpetuity clause,” the obligation to pay those ridiculous maintenance fees can pass on to your heirs. And while beneficiaries can refuse the timeshare, timeshare companies can still come knocking because it’s technically part of the deceased’s estate and is subject to probate. But timeshares are a waste of money in general, so it’s best to avoid the hassle altogether and get out while you still can.
Secured vs. Unsecured Debts
Remember when we talked about paying off debt through your estate? Sometimes, your estate may not be enough to cover your debts. Here’s what happens to your debt after your death if you don’t have enough assets to cover it:
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In the case of “insolvent estates” (those where the debt equals more than the value of assets), there’s a certain order in which creditors (the people you owe money to) are paid, which varies by state. This process is determined by which one of two categories your debt falls into: secured or unsecured.
Secured debt (such as mortgages, car loans, etc.) is backed by assets, which are typically sold or repossessed to pay back the lender. With unsecured debt (credit cards, personal loans, medical bills and utilities), the lender doesn’t have that protection, and these bills generally go unpaid if there’s no money to cover them.
But each kind of debt has its own set of rules, so let’s look at them each individually.
This is probably the most complicated debt to deal with, but in most states, medical bills take priority in the probate process. It’s important to note that if you received Medicaid any time from age 55 until your death, the state may come back for those payments, or there may already be a lien on your house (meaning they’ll take a portion of the profits when the house is sold). Since medical debt is so complex and can vary depending on where you live, it’s best to consult an attorney on this one.
If there’s a joint account holder associated with the credit card, that person is responsible for keeping up with the payments and any debt associated with the card. (This does not include authorized card users.) If no one else’s name is listed on the account, the estate is responsible for paying off the card debt. And if there isn’t enough money in the estate to cover the balance, then creditors will typically take a loss and write off the amount.
Home co-owners or inheritors are responsible for the remaining mortgage, but they are only required to keep up the monthly payments and do not have to pay back the full mortgage all at once. They can also choose to sell the house to keep it from going into foreclosure.
Home Equity Loans:
Unlike a basic mortgage, if someone inherits a house that has a home equity loan, they can be forced to repay the loan immediately, which usually results in having to sell the house. But you don’t have to die for a home equity loan to backfire on you. Borrowing on your home beyond the initial mortgage is always a bad idea, so save your heirs the headache by avoiding home equity loans in the first place.
As with other secured debt, your assets can be used to cover car loans, but the lender has the ability to repossess the car if there’s not enough money in the estate. Otherwise, whoever inherits the car can continue making the payments or sell it to cover the loan.
Federal student loans are forgiven upon death. This also includes Parent PLUS Loans, which are forgiven if either the parent or the student dies. Private student loans, on the other hand, are not forgiven and have to be covered by the deceased’s estate. But again, if there’s not enough in the estate to cover the student loans, they usually go unpaid.
What Can Creditors Take From an Estate?
Legally, creditors must be notified of a debtor’s passing by either their executor or family members. Creditors then have a specific time frame (usually three to six months after death, depending on the state) to submit a claim against the deceased’s estate.
Thankfully, there are a few things creditors can’t touch, including life insurance benefits, most retirement accounts, and the contents of living trusts. (This doesn’t apply if there are no living beneficiaries listed in the person’s will, though, so be sure to keep those updated!) But that beloved boat, prized coin collection or anything else that has value can easily end up being liquidated (sold for cash) to cover your debts if necessary.
Here’s the reality: Debt collectors aren’t much better than grave robbers. Even when you pass away, credit card companies still want their money, and they have no problem calling your grieving loved ones to try and get it. But it is illegal for creditors to try to get money from a deceased person’s relatives unless they’re a spouse, parent of a deceased minor, guardian, executor or administrator of the estate, or they cosigned or are legally responsible for the amount owed.2
If you’re another family member getting these calls, you can tell those heartless creeps to buzz off!
Why You Need Life Insurance
Even if your family isn’t officially liable for the debt you leave behind, having your estate eaten away by creditors can be just as traumatic. Do you really want your spouse or your kids to watch their home, cars and other possessions disappear while they’re in the middle of grieving your death?
That’s where life insurance comes in!
Because it’s exempt from creditors, life insurance basically guarantees that your spouse and children (and whoever else you include as a beneficiary) will get money after you die. But life insurance acts as a shield between your family and the repo man, making sure they have enough to live on even after your assets get cleaned out by creditors.
Listen: Term life insurance is the only way to go. It provides great coverage and ensures that your family is taken care of—plus, it’s a much more affordable option. If you’ve got people depending on your income, you need life insurance. No ifs, ands or buts about it! So do yourself (and your loved ones) a favor and get a policy today.
Debt Is Not a Death Sentence
All this talk of debt after death can be . . . overwhelming. And if you feel like you’re drowning in debt, you’re not alone. In fact, Americans rank personal finances and money as their most significant source of stress.3
No matter how deep in debt you are, it’s never too late to get help and turn your life around. It may seem like there’s no way out, but there is hope! You can be debt-free and change your family tree!
If you feel burdened by money stress, our Ramsey financial coaches are here to help guide, encourage and equip you to make the best decisions for your situation. Find a coach near you and set up a call today.
And while it may seem like your situation is hopeless, that couldn’t be further from the truth. Getting out of debt and changing your life is possible. It won’t be easy, but it can be done. Your life is far more precious than your debt or how much money you have. Find a counselor in your area to talk to. You are worth it.
If you are feeling suicidal, please call the National Suicide Prevention Lifeline at 1-800-273-8255 or text HOME to 741741.
Student Loans and Suicide
The United States is in a student loan crisis. And it’s not just taking a toll on our finances—it’s taking a toll on our mental health.
The Community Mental Health Journal did a study of students. And of that group, 15.5% of those in debt had a mental health disorder, while only 8.9% of those without debt had a mental health disorder.4 That’s sobering evidence of the negative effect debt is having on our graduates.
But suicide is not the answer. First of all, it may seem like you’d be doing your family a favor, but no amount of erased debt can fill the void that your absence would create. Second, while paying off your student loan debt can seem impossible, it’s well within your realm of possibility. You can pay off your student loans fast. It won’t be a breeze. But it’ll be one of the most liberating and empowering things you’ll ever do.
How to Protect Your Family From Your Debt
What if instead of worrying about how your family would survive after you’re gone, you could have peace of mind knowing they were well taken care of? That’s why it’s important to think about your legacy, which includes proper planning—and attacking your debt.
Half the battle of leaving a good legacy is making sure you legally prepare for what will happen with your finances after you die. Having a will makes the probate process so much easier on everyone involved, so go ahead and check that off your bucket list—pronto.
Getting your affairs in order also means talking with your spouse and children about inheritance, and depending on the size of your estate, meeting with your lawyer. Yes, these kinds of conversations can be awkward and a little morbid, but they can save your family a lot of pain and stress down the road.
Get Out of Debt
Ultimately, the best way to make sure your debt doesn’t affect your heirs is to say goodbye to your debt—right now. Sure, it’s tempting to postpone paying off your debt until you’re older, but as we know, debt can outlive the debtor.
Don’t put your legacy on the back burner. Don’t know where to start? Start with Financial Peace University, our nine-lesson course on how to budget better, pay off debt faster, and save more money, so you can live the life you dream of and leave a legacy you can be proud of.
And if you're really just wanting to talk things through with a person—no judgement included—get in touch with a Ramsey Preferred Coach today.