What Happens to Your Debt When You Die?

In most cases when a person with debt dies, it is their estate and not their children or heirs that are legally responsible. Here is what you should know.

Debt After Death

When you die, your estate – which consists of the assets you owned such as real property, investments and cash – will be responsible for paying your debts. If you do not have enough cash to pay your debts, your heirs will have to sell your assets and pay off your creditors with the proceeds.

Any remaining assets left after debts are paid off will be distributed to your heirs as directed by the terms of your will or trust. If you do not have a will or trust, the intestacy laws of the state you resided in will determine how your estate will be distributed.

If you pass away without enough assets to cover your unsecured debts, such as credit cards, medical bills, and personal loans, then your estate is considered insolvent, and your creditors may have to write off some or all of the remaining debt.

Secured debts, which refer to loans attached to an asset such as a house or a car, are handled differently. If you have a mortgage or car loan when you die, those monthly payments will need to be made by your estate or heirs. If the loans are not paid, the lender can seize the property.

There are some exceptions that would make your heirs legally responsible for your debt after you pass away. If the heir is a joint holder on an account that you owe money on, the heir is legally responsible for the debt. Similarly, if your heir co-signed a loan with you, the heir is liable for the loan.

Spouses Beware

If you are married, the debt inheritance rules discussed above also apply to surviving spouses unless you reside in a community property state. Community property states, which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin have different rules. In these states, any debt that one spouse acquires during the marriage belongs to the other spouse too. Therefore, spouses in community property states are usually responsible for their deceased spouses’ debts.

Protected Assets

Assets such as IRAs, 401(k)s, brokerage accounts, life insurance policies or employer-based pension plans are usually protected from creditors. These types of accounts have designated beneficiaries, and the money goes directly to the beneficiaries without passing through the estate.

Settling the Estate

If you pass away with outstanding debts and no assets, settling your estate will be relatively simple. Your executor should notify your creditors by sending a letter that explains the situation and includes a copy of your death certificate. If a debt collector becomes aggressive with your heirs or tries to guilt them into paying, they should remember they are not legally responsible.

If you have some assets but not enough to pay all your debts, your state’s probate law has a list of the order of priority for paying debt. While the specifics can vary by state, estate administration fees, funeral expenses, taxes and end-of-life medical expenses are usually paid first, followed by secured debts and, lastly, unsecured debts.

Need Legal Help?

If you or your heirs have questions or need legal assistance, contact a consumer law attorney or probate attorney. If you cannot afford a lawyer, consider searching online for free or low-cost legal help in your area.

Savvy Living is written by Jim Miller, a regular contributor to the NBC Today Show and author of "The Savvy Senior” book. Any links in this article are offered as a service and there is no endorsement of any product. These articles are offered as a helpful and informative service to our friends and may not always reflect this organization’s official position on some topics. Jim invites you to send your senior questions to: Savvy Living, P.O. Box 5443, Norman, OK 73070.