What happens to debt when you die?
It’s common to have debt when you die. It could be a few thousand dollars on a credit card or two; student loans from when you went to college; a car loan; a mortgage that isn’t paid off. But what happens to these debts when you die? Are heirs responsible for paying off the remainders? Or are the creditors out of luck? It mostly depends on assets you leave behind. Let’s look at the probate process, and these four types of debt from the eyes of family of the recently deceased.
When you die, your estate – all your money and assets that are not assigned out in a will, or assigned to people who are also deceased – will make up your estate. Assets – physical objects – will be sold, and the money added to the estate, for the purpose of paying debts. Probate, in short, is using your assets to pay off debts, and then pay heirs. This process is done by the executor of your will and estate – usually someone you assign prior to death.
It should also be noted that the executor follows an order of who gets paid first – unsecured debts, like credit cards and medical bills, come after secured debts like mortgage and auto loans. Then come your assigned heirs.
There are a few exceptions, protected assets that are not used during probate. These include retirement accounts and life insurance. So long as the beneficiaries are still alive upon your death, they will receive the contents of the account or policy. Thus, it’s important to keep these up to date. If the beneficiary is deceased, the assets will go to the estate.
The first major question: Are you a co-signer on the account, or just an authorized user? The former will result in the debt being transferred to you. It was a joint account, and thus joint debt.
But if you were simply an authorized user, the deceased’s estate – all of the assets left over after they die, with some exceptions we’ll go over later – is responsible for paying.
What happens when the assets in the estate, often liquidated items, runs out and the executor of your will has nothing to pay with? The creditors are out of luck. This doesn’t mean they won’t hassle you, because they certainly want their money back.
Horror stories have made the rounds of collection companies calling at all times of day and night, every day of the week, in an effort to get money back – even if you don’t owe anything, but the deceased did. They might even try to trick you, insisting you owe them. Ask for proof that you are a co-signer and not just an authorized user.
There are two types of student loans – private and federal. Private loans are just that – loans through a company or the school itself. These behave much the same as credit cards – collection companies will go through the executor and estate, collecting money from the estate until the debt is paid, or there is no money left. Bear in mind that you, like credit cards, you may still get calls, even if you are not responsible for the debt. Creditors are legally allowed to call you to determine if there is someone authorized to pay them.
Federal students, however, are simply forgiven upon death. There will be no collection from the estate, no hounding the deceased’s family.
Mortgage and home equity loans
Mortgages need to be repaid to banks, but there are protections afforded to joint owners and inheritors. Federal law prevents joint owners from needing to pay off the mortgage immediately. Basically, you take over paying the mortgage.
The bank cannot foreclose immediately on death, either. But, if you fail to pay the mortgage, as in any normal situation, the bank can and will foreclose the house.
A home equity loan, however, will need to be paid off immediately, unlike a mortgage.
Much like the inherited home, if you inherit a vehicle, you can assume the payments and keep the car. Or, you can instead let the bank take it. The lender can repossess the car if there is outstanding debt, and you have no intention on paying it. Essentially, you can assume the asset – the actual car, and thus payments – but not the debt, so if you don’t pay, the car is taken, and that’s all the lender cares about.
Now knowing that some loans will be paid through estates, while others require payments or repossession, you may think it’s clever to gift away all of your money and assets just prior to death. They won’t be your assets, so they won’t be sold to cover the costs your estate would need to pay.
Except judges have been known to reverse these gifts, if given just prior to death, seeing through your smart tactic. The judge will require the gift be given back to the estate.
Some states have different laws. This could be regarding probate – how long a creditor has to start the collection process – or on the debt side. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community property states, where spouses are not responsible for debt incurred before marriage – though half of any community property can be used as assets for the estate to pay off those prior debts.
Just remember – a debt collector trying to get money from you may not be telling the whole story. You may owe them nothing, especially if you were not a co-signer or part of a joint account. Do research into your state’s laws, and report any problems to your state Attorney General’s office and the Federal Trade Commission. If you are unsure of your rights, the state Attorney General’s office can help.