What Happens to Your Debt After You Die?

Do you have any kind of debt? If so, you may want to consider what will happen to that debt if you die before paying it off. Many people avoid this topic, but it’s important to understand just what can happen to those bills when you’re gone.

Who’s Responsible?

When you die, your debts may or may not pass on to other people, depending on the type of debt you held.

• Single Signer
• When you are the only person who took on the debt, no one else will be responsible for it.
• Your assets will be used against the debt. These could include:
• Your share of a house if you co-own.
• Property and vehicles.
• Any bank accounts.
• Co-Signers/ Joint Account Holders
• Anyone who co-signed for a loan or is a joint account owner with you will be responsible for all future payments in the event of your death.
• Commonly co-signed accounts include:
• Student loans
• Student credit cards
• Mortgages
• Authorized User
• An authorized user may use the credit holder’s account, but is not legally obligated to pay the debt.
• In the event of your death, any authorized users must stop using the account.

How Debts Are Paid Post-Mortem

Just because you are gone and no one else is responsible for your debts doesn’t mean the banks and credit card companies will go unpaid. Here’s what happens:

• Your assets are evaluated.
• Debts are prioritized and paid off using the assets from your estate. This will usually be similar to the following, but will vary by state:
• Funeral costs
• Legal fees
• Court fees
• Credit cards

Leaving an Inheritance: Is It Worth It?

What about property and items left to your family and friends? What will happen to these when you die?

• If there is still money owed, the person inheriting the property will usually have a choice:
• Sell the property to pay the debt.
• Pay the debt in order to keep the property.

Community Property

Some states have "community property" laws, which change the game.

• Which States are Community Property States? 

• Alaska.
• Arizona.
• California.
• Idaho.
• Louisiana.
• Nevada.
• New Mexico.
• Texas.
• Washington.
• Wisconsin.

• Community property laws can affect how certain debts are treated and can have differing tax consequences for property upon death of a co-owner. .
• Talk to a lawyer to find out just what happens after death if you live in a community property state.

Preparation can be key to avoiding problems after your death. You can structure and separate accounts to avoid leaving family or friends with your debts and make sure to stay on top of things when possible. Many sources recommend using a lawyer when doing your estate planning to make sure you haven’t left any loose ends.