What happens to my debt when I die? Does it just go away? Or will my family be responsible to pay it for me? The answer depends on a few factors, including the type of debt, if you have any assets when you die, and if you’re legally married or not.
We generally don’t like to dwell on thefact that we all will die eventually. However, if you don’t make properarrangements for your debts and assets after your death, you might leave behinda mess for your loved ones to clean up.
What Happens to my Debt When IDie?
In part one of this series, I talked about what happens to your money and other assets when you die… But what about your debt: mortgage, car loan, credit cards, medical bills, and student loans? Read on to find out!
What Happens to My MortgageWhen I Die?
If you own a homejointly with your spouse, the house or condo transfers to your husband or wifeThey will be responsible to continue paying any debt associated with theproperty, whether it’s a mortgage or home equity loan. Typically, both spouses’names are on the deed to the property and the loan. As long as the survivingspouse continues making the payments, nothing really changes.
What if yourspouse can’t afford the current mortgage payment because of the loss of yourincome? He or she will either have to refinance the loan, or sell the house andbuy something more affordable. This is why I recommend you have sufficient termlife insurance on both spouses so the surviving one is able to stay in the home.
What if you own ahome with a mortgage, but you’re not married?Well, you better have a will or estate plan that designates thebeneficiary of your property, so it doesn’t go into probate. Typically, yourheir decides whether or not they want to sell the property. If the person wantsto keep it, and there’s a balance on the mortgage, he or she will be requiredto pay it off. If your heir decides to sell it, once the real estate commissionand the mortgage is paid, the person will receive the remaining money as theirinheritance.
The process isvery similar for loans on cars, motorcycles, boats, ATV’s and the like.
What Happens to My Credit CardDebt When I Die?
If you have creditcard debt when you die, your estate is responsible to pay it. This means if youhave any funds in your bank accounts, they must be used by your heirs to payoff your debt. If you’re married and your spouse is already listed on youraccounts, they will be responsible to continue paying on them.
If you’re not married and there isn’t any cash available to pay off your credit card debt, the bank is generally left holding the bag. According to CreditKarma, “Family members of a deceased person are typically not obligated to use their own money to pay for credit card debt after death…”
This happened whenmy mother-in-law passed away several years ago. There wasn’t enough cash in herbank account to cover her credit card bills. As her financial power ofattorney, I sent copies of her death certificate to each of her creditors alongwith a note explaining that she didn’t have any assets in her estate to paythem.
However, if youhave a co-signer on a particular credit card, that person becomes solelyresponsible for paying the debt. This is one of the many reasons I stronglycaution against co-signing credit cards (or any other loan), even for a familymember.
What Happens to My Student LoanDebt When I Die?
As you mightalready know, student loans are exempt from bankruptcy, so the only way to getrid of them is to pay them off. But what happens if you die and there’s stillan outstanding balance on your student loan?
According to The Motley Fool, “If you have a federal student loan, then the federal government will discharge any remaining debt upon your death. That means your balance will get zeroed out, and your loved ones won’t have to repay the student loan after you die.” Private student loans, on the other hand, are not required to discharge the balance if you die and will likely move to collect from your estate.
If you aremarried, most states do NOT allow lenders to collect student debt balances fromsurviving spouses, even if the loans were taken out during the marriage. But ifyour husband or wife cosigned on your student loan, that’s an entirely differentstory.
If you have a cosigner on your private student loan, the person may be required to pay your balance when you die. Some lenders do take compassion on the family of the deceased and voluntarily release the cosigner from the responsibility of the student loan. (But I have a feeling that’s the exception to the rule.)
What Happens to My Medical DebtWhen I Die?
If there isn’tenough money in your estate when you die to cover medical bills, they typicallygo unpaid. If your loved one signs as a responsible party for a medicaltreatment or a procedure, the provider will likely pursue them for payment ifyou die and leave the debt unpaid.
Years ago, when Iworked as an HR manager for a manufacturing company, one of my employeesreceived a paycheck garnishment notice for tens of thousands of dollars. Thisperson cosigned for an experimental cancer treatment for their mother, in hopesit would save her life. Unfortunately, the treatment didn’t work and the motherpassed away.
The employeeignored the bills for several years, thinking the medical facility had given uphope of collecting. However, the provider took the case to court and received ajudgment against this employee. That person ended up with a 3-year garnishmentof several hundred dollars per pay check until it was paid in full.
Here’s the bottom line: excessive debt is bad news all the way around. Now you know the answer to the question “What happens to my debt when I die?” It’s important to know what types of debt you have right now and how it could affect the family you leave behind when you die.
