Typically, family members won’t inherit debt unless they’re a cosigner on an account. However, if you have debt when you pass away, it doesn’t just go away. Creditors may seek payment for outstanding balances from your estate, and in some cases, may aggressively reach out to your family or next of kin.
When it comes to what happens to debt after someone passes away, the balance sheet definitely leans toward the complex, but we’ve covered some of the basics below to get you started on planning for the future.
What types of debt might you have?
Before you can understand the future of your debt, you have to understand what types of debt you might have currently. Here are some common forms of debt you might be dealing with.
- Credit cards. These are revolving accounts with no collateral, which means no assets are tied to the balances. Credit card companies can attempt to collect by levying bank accounts or other assets, but they can’t simply show up and take back what you purchased with the card.
- Mortgage. This type of debt is tied to a piece of property or building – often a home. Because the debt is tied to the property, if payments aren’t made for a certain amount of time, the lender can move to foreclose on the property in question.
- Auto loans. Like mortgages, vehicle loans are a secured debt. That means failure to pay the monthly note can result in repossession of the vehicle.
- Student loans. These loans aren’t tied to a physical asset – the lender can’t show up and take away the education, for example.
- Other common types of debt may include signature loans, which are loans you receive based solely on your promise to pay them back. They aren’t tied to assets that can be repossessed.
What happens to each type of debt when you pass away?
What happens to debt when someone passes away depends upon a variety of factors. The first factor is whether or not the deceased was the sole owner of the debt.
Debt that is co-owned
Debts can be held by a single individual or by multiple individuals, which is an important distinction for planning for the future. There’s a difference between money borrowed by two people and money borrowed by a single individual without any cosigner.
If, for example, a married couple agrees together to a mortgage, and one of those individuals passes away, the mortgage is still viable and owned by the surviving spouse. If two business partners have a business credit card account and one passes away, the surviving partner typically still owes any balance associated with the account. It’s important to keep this type of survivorship in mind when cosigning debt with or for anyone.
Debt that is covered by the estate
When debt is attached only to the deceased, what happens with it depends on both state laws and the type of debt it is. Some basic guidelines are provided for various types of debt below.
All debt can and will be paid by the estate if there are any assets. For example, if the deceased owned a house, some fine art pieces, and a vehicle, those items might have to be converted to cash to pay any secured debts. The settlement of debts in an estate is handled by the estate executor before any inheritance takes place.
So, if someone passes away with $100,000 in assets and $80,000 in debt, the heirs will only receive $20,000 in assets.
Debt that can’t be covered by the estate
If there aren’t enough assets to cover debt, lenders take action depending on the type of debt.
Unsecured debt, such as credit cards, signature loans, or student loans, cannot typically be collected from heirs. One exception is if someone runs up debt on behalf of an heir in bad faith — for example, if a terminally ill relative takes out debt and provides the funds to a loved one, knowing they will not be able to make payment on the debt.
Secured debt, such as a vehicle loan or mortgage, may result in a repossession or foreclosure unless heirs want to keep the property and are willing to make arrangements with the lender to take over payments or refinance the loan. If the family doesn’t want to keep the property and no one cosigned for it, there’s typically not a negative consequence for letting the lender take the property back.
What state laws come into play?
As with anything legal or financial, there are numerous exceptions to the common rules. The Federal Trade Commission notes that family members (especially spouses) may be held responsible for certain debts if they live in a community property state.
Some state laws also require surviving spouses to pay certain medical debts, and if you’re responsible for administering an estate and don’t follow probate laws, you might end up owing creditors you didn’t pay appropriately with estate funds.
Because the various state laws, forms, and requirements can get complex, it may be a good idea to consult an estate attorney or financial professional if you’re dealing with a lot of financial questions or debt after a loved one passes away.
Can you protect your loved ones from any debt you may pass on?
Looking ahead and preplanning is always a good way to minimize the burden for loved ones. Some things you can do now to protect your loved ones include:
- Making a list of all debts and accounts so your estate executor is sure to handle everything correctly.
- Creating a list of digital assets with login credentials to facilitate estate administration.
- Setting up a trust to protect certain assets from creditors.
For more information about preplanning — from financial and legal to final wishes and memorials — subscribe to our free Thinking Ahead email series.
Note: Neptune Society is a trustworthy provider of cremation services. This is intended as a resource to help families. Be sure to speak with a professional regarding financial or estate planning.