What Happens to Your Debt When You Die? - Quicken Loans Zing BlogLet’s start by acknowledging that death’s no fun to talk about. It’s easier to kick that rusty can down the road, saving those darker conversations for another day. But before you take the “financial ignorance is bliss” approach, you need to consider how your debt will affect your loved ones after you’re gone. In an ideal world, you wouldn’t have any debt to pass on to your family. But whether it’s caused by circumstances or life choices, some of us will inevitably be in the red even when we’re dead. Let’s take a deeper look at what happens to your debt when you’re gone.

Where There’s a Will

While we’re contemplating mortality, make sure you’ve taken some time to create a will. Not only is it cheaper than ever before ($20–$50), but it allows you to better protect your estate and divvy it up as you see fit. Without a will, your assets will be handed over to the state and then given to your next of kin. If you want any say in where your estate is headed, make sure you sit down and make a will.

What Happens to My Debt When I Die?

After you’ve taken your final bow, your estate generally owes any of your debts. If you have enough assets to pay for these debts, someone known as an executor (such a cheery title) is responsible for selling those assets and settling up with the creditors. If your estate doesn’t have the funds to pay for these personal debts (this is called a solvent estate), then the debts typically die with you. But not always.

In the event that your estate does cover the amount of your debts, the rest of your estate is then given to your heirs. But remember, creditors will come before your heirs.

Undead Debts

The largest exception to the dying debts is when one of your loved ones acts as a guarantor or co-signs one of your loans. By doing this, they’re saying they will assume the loan if you can’t. And, to be frank, you can’t do much assuming when you’re dead.

This is also the case for spouses that have joint credit card accounts. Even if your spouse had nothing to do with that boat you purchased on a credit card, they’re still responsible for paying it off. This is not suggesting that you and your spouse should absolutely have separate accounts for your debts and assets. In fact, if managed well, that can be a powerful booster to your finances. But before you tie the financial knot with anyone, make sure you can trust their spending habits.

It’s important to note that an authorized user on a card is not the same thing as a co-signer. An authorized user will not be required to pay the debts of the deceased account holder.

Dying to Get Rid of Student Loans

It’s surprisingly difficult to have your student loans discharged. You can’t even get rid of them by filing for bankruptcy (in most cases). In life they’re attached to you like a bad tattoo. Death, however, is an excellent cure for most federal student loans.

Private banks aren’t nearly as forgiving of student loans. Private student loans can eat away at your estate if you haven’t planned a way to protect yourself (we’ll talk more about this in just a bit). Since 2009, though, many private student loan lenders have become better about wiping the slate clean after death, but each lender is different.

The Mortgage

According to federal law, a surviving spouse – with proof of financial ability and creditworthiness – will be able to take over the mortgage if you die, rather than paying the full balance back to the mortgage company. Once again, talking to your family is an important part in this process. You need to communicate the realities of the situation, specifically those that involve finances. In some cases, it may make sense for your spouse to downsize to a cheaper house so that they can have a more manageable monthly payment.

Protecting Your Estate from Debt

While there are always exceptions at the state level, in most cases, 401(k)s, life insurance policies, IRAs and brokerage accounts are protected from creditors. This allows you to list individuals as your beneficiaries, and it keeps the money from going to your estate. Remember, in an estate, creditors come before heirs.

The Exceptions: Community Property Laws

Some states have something called community property laws, which could definitely affect the way your debt is treated after you’re gone. These laws require that any debts or assets that you’ve obtained after you got married are also the responsibility of your spouse. In other words, even if your spouse isn’t on the car loan, he or she is still responsible for paying it off when you’re gone.

Below are 10 states in the U.S. that have community property laws: Arizona, California, Idaho Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Alaska makes the list too, but residents have the option to make their property considered community property or not.

You Can’t Take It with You

Debt can certainly be a headache during life, but under certain circumstances, it can be a tragedy after death. If you’re not careful, your family could suffer the consequences. Discussing death isn’t easy, but do yourself and your loved ones a favor by sitting down and talking about these financial decisions. And if you have any questions at all, don’t hesitate to speak with a lawyer.

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This Post Has 6 Comments

  1. My sister just passed away in January and had a mtg loan with the house being the lein. I am on the deed for this hoise and there are mo assets to make payments on this loan. Am I responsible for this loan? I don’t want to lose the house.

    1. Hi Lynn:

      I’m very sorry to hear about your sister.

      You have two different concerns here. If you’re not on the mortgage, you’re not responsible for the loan. However, if no one makes payments on the loan, the house would go back to the lender in a foreclosure. I would talk to the lender and/or servicer on the loan and see if you can maybe refinance to try to lower the payment. You could also see if you could work on getting a modification in order to help you afford the payments. That would be where I would start. Both of these options would require you to get your name on the loan before moving forward. The other option would be to sell the house. I don’t know if you’re living there, but if you truly can’t afford it, this might put you in the best financial position moving forward. Just something to think about. Good luck!

      Thanks,
      Kevin

  2. hello, I lost my husband to cancer march 2016, he was diagnosed with stage 4 grade3 cancer which had already mets to his brain with 5 brain tumors upon diagnoses. He was given 3 months to live but managed to make it almost 21 months. He however was never ok mentally after the whole brain radiation he endured. I tried to get the wills done but it was no use. He didn’t have the true cognitive ability to do it. So he died without one. I am in a community property state of Texas. When he died he was the only one on the mortgage loan even though I am on the deed of trust, I have a affidavit of heirship and we were married when we had the home built in 2005. the mortgage company, a high powered one has gone through 6 modifications and assumption modifications with me and I am still fighting. We paid 143,000 for the home when we had it built. it was paid down to 123,000 when my husband died. they now have it jacked up to over 153,000 which has taken over 30,000 dollars of the equity I had in the home. I have been riped off by attorneys and I don’t know what to do anymore. I am chronically ill on disability, I’m widowed, I will be 63 the 16th of this month of December. I feel like I have no one to help me nor do anything for me to help me keep my home. This is my home all I want to do is make my house notes and live here peacefully. My husbands ashes are also here. He planted the tress in our back yard. Who can I turned to to sik them on this mortgage company. there has to be a government agency or someone who can help me. Please can you give me any help or answers at all. I need help so badly before I have a nervous breakdown!

    1. Hi Carolyn:

      First, I’m sorry to hear about your husband and your situation. It sounds very difficult and you have my deepest sympathy.

      It sounds like you really need to talk to an attorney. If you can afford to make the home payments, you’re legally allowed to stay in the home as his spouse. However, as you’ve been going through modifications, it sounds like there’s some financial difficulty. That being said, if you feel like they’re not treating you fairly during this process, you can try filing a complaint with the Consumer Financial Protection Bureau or Federal Trade Commission. They’re tasked with making sure that lenders treat people fairly and they may have some resources for you as well. Depending on the type of loan you have, your lender or servicer may be able to go over different modification options as well. I’m sorry, but that’s the best I can tell you.

      Thanks,
      Kevin Graham

  3. I have a walmart card on my credit report a zero balance. I was a user and paid the bill every month when we were together. Now we divorced. I called walmart i had his cardvand mine they could not find it. But its on my credit as 0bal þ6y that hurts credit. All i wanted is too start it back up. I tried usinng it at walmart and almost go thru then something stops it? What do i do? Thank you.

    1. Hey Cristen:

      There are several variables here. Walmart may not actually have the card information. Many times store-branded cards are actually issued by a different bank. You may have to find out who the issuer is and deal with them. If you had a joint account, they may make you cancel the card and reapply on your own because they were relying on both the credit history of you and your husband when you made the original application. I can’t tell you much more other than to find the issuer. I hope that helps.

      Thanks,
      Kevin Graham

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