Of the many downsides of death you could name, you might think an upside is that you no longer have to worry about the massive pile of debt you’ve accumulated over your life—almost $62,000, on average, according to a 2017 report from Credit.com—from astronomical health care bills to the mortgage on the house you couldn’t afford to your tens of thousands of dollars of student loan debt.
“Finally,” you think, on your death bed, “I am free from the shackles of the $10,000 in credit card debt I owe for buying meaningless possessions that did nothing to fill the void inside of me.”
Unfortunately, it’s a bit more complicated than that for your relatives.
When you die, all of your assets—cash, real estate, bank accounts, etc.—make up your estate. Your estate’s value is determined through a court proceeding known as probate. Before you pass on money (or whatever) to your heirs, your debts are repaid. An executor handles all of this, and will (hopefully) pay off your debts with your estate. If there’s not enough in your estate to satisfy creditors, your family members may be in for an unwelcome surprise.
Mortgages and Car Loans
Someone else will be responsible for your mortgage if it’s inherited or they’re a joint homeowner. If not, the executor will pay off the debt. Because mortgages are secured debt, lenders get first dibs on your assets to recoup their loan. Similarly, if you have a home equity loan, a lender can demand payment upfront from the person who inherits the house.
That’s true even if people still live in the house after you die. If you have debt, they’ll either have to take on the mortgage or sell the home to pay back creditors.
The same is true for a car. If the estate can’t cover the cost of the debt and you have a co-signer, they’re responsible for the rest of the loan. If they don’t pay it back, the car may be repossessed.
Credit Card Debt and Medical Bills
Credit card debt isn’t secured, meaning if the estate runs out of funds after the mortgage and car loans, there’s nothing for creditors to sell to get their money back. However, if you have a joint account holder, they’re on the hook (authorized users are not, but they won’t want to continue to use the card).
If there’s no money left in the estate after the mortgage and car loans, credit card companies may be out of luck, unless you live in a community property state, which include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In this case, your spouse is on the hook for all debt incurred over the course of the marriage (they’re not responsible for any previous debt).
The same is true of medical bills. If there’s money in your estate, creditors can make claims. If not, the debt may die with you, unless you live in a community property state.
Student Loans
Federal student loans are discharged, or forgiven, when you die, and federal PLUS loans are discharged upon the death or the student or the parent. If there’s money in your estate, that’ll be put toward private student loan debt. If there’s no money left, student loans are unsecured and therefore won’t be repaid (reportedly Sallie Mae and Wells Fargo offer forgiveness in the case of death or disability, but that’s not the norm).
An exception is if you have a co-signer. They’ll be responsible for the remaining debt, as will spouses in community property states if the loans were taken out during the marriage. (Some states have exceptions for student loan debt, so you’ll want to check.)
So what’s safe from creditors? Usually retirement accounts and life insurance (unless the beneficiary and the deceased share debt). Everything else is pretty much fair game. Since everyone dies, it’s a good idea to talk to a lawyer and get your estate in order so your family doesn’t have to deal with it.