What Happens to Your Debts After You Die: What You Need to Know

Have you ever wondered what happens to your debts after you die? This article takes a look at smart ways to dispose of your assets and debts so that your heirs don’t get short-changed or perturbed.

When someone dies and leaves debts, what happens to these debts depends on a number of things. These include what kind of debt it was, if it was secured against anything, if there was a guarantor or insurance and if there are enough assets left in the estate.

Unless the surviving relatives are co-signers or guarantors of the loan, they will not be liable for paying off any debts out of their own pocket. This guide will help you find out what debts need to be repaid and what you need to do.

Debts After Death

When you die, any debts you have must be repaid from your estate before any other claims on the estate can be met. This is the case whether or not you have made a will. Your ‘estate’ is all the property, goods, and money that you own that are available to be distributed after your death.

If you die and have no estate, then your debts die with you as they cannot be repaid. Your relatives do not have to pay off your debts unless they have provided personal guarantees for those debts. Your creditors can sue your estate for the payment of outstanding debts.

Who Handles Your Debts When You Die?

It is the responsibility of the executor or administrator to pay off the debts. Being an executor does not mean you will be held personally liable for any debts of the estate.

However, there are some exceptions, and taking on the responsibility does come with some risks. However, if it’s a large or complicated estate, you might want to consider seeking the advice of a solicitor or probate specialist.

Types of Debt

You may have picked up on the phrases ‘individual’ and ‘joint’ debt above, and not been clear on their meaning. So, before going any further, we should define some terms.

In the broadest sense there are four types of debt:

Individual debt is one where one person has taken it out in their name alone – a credit card debt is one of the most common forms of individual debt.
Joint debts are where two or more people take out the debt in both their names – a joint mortgage is the obvious example.
A secured debt is where a loan is taken out against an asset – like a car loan or a mortgage.
Unsecured debt is one that’s paid back in installments, like a student loan.

What Happens to Specific Debts?

Not all private debts are handled the same after the person who owes the debts dies. Here’s how some major consumer debts are handled:

Mortgage Debt

The rules vary on mortgage debt after the mortgage holder dies. In general, the mortgage passes to a spouse or partner whose name is also on the mortgage. That joint mortgage holder can’t be forced to sell the house right after the death of the co-mortgage holder.

In the event no joint mortgage holder exists, the mortgage can be paid through the deceased’s estate. However, if there are insufficient funds to pay the mortgage, whoever inherits the home can move in and resume making the mortgage payments.

Home Equity Loans

Contrary to home mortgage loans, creditors can demand that whoever inherits the home (and the loan) after the death of the homeowner immediately repay a home equity loan.

However, the lender doesn’t have to do that. In many cases, the home equity lender will agree to the heir making the loan repayments.

Credit Cards

With a credit card, any joint account holder is liable for payments and debts after the co-account holder dies. If there is no credit card account holder, things get more complicated, especially for the credit card company.

In the event the deceased is the sole account holder, the credit card company has no recourse and can’t go after any unpaid debts, even if the card has authorized users (who aren’t held liable for credit card debt.)

The exception is for spouses who live in community property states, who may or may not be liable for outstanding credit debt when a spouse dies. It’s best to consult a lawyer to see if you may owe these debts.

Auto Loans

Auto loans are similar to mortgage loans in that the estate can handle payments if the money is available. If not, whoever inherits the vehicle has the option to continue making payments or selling the vehicle to cover the cost of the auto loan.

Student Loans

The executor can use estate funds to pay off student loan debt. If the funds aren’t available, student loan providers cannot force the estate to pay off the loans, as student loans are unsecured.

That scenario changes if there is a co-signer for the loan. In that instance, he or she is liable for repaying the debt. Spouses in community states may be liable for student loans incurred during the marriage. It’s best to consult a lawyer to see if you may owe these debts.

Which Assets Are Protected From Creditors?

There are certain assets that creditors can’t go after once you die, such as:

Retirement accounts: These may include an employer-sponsored 401(k) or 403(b) plan, Solo 401(k), SEP IRA, Simple IRA, Roth IRA or a health savings account you may have to fund your retirement.
Life insurance: Life insurance is a contract you sign with an insurer so your beneficiaries are paid a lump-sum payment or death benefit when you die, as long as you make premium payments.
Living trust: With a living trust, you can pass on the property while avoiding the expenses and delays that often come with probate. A living trust is considered a valuable estate planning tool.
Brokerage accounts: Any taxable investment account you open with an investment company or brokerage firm is referred to as a brokerage account. You may invest in stocks, bonds, REITs, CDs, or other investment vehicles within a brokerage account.

How to Notify Creditors of Death

Once your debts have been established, your surviving family members or the executor of your estate will need to notify your creditors of your death. They can do this by sending a copy of your death certificate to each creditor.

When your creditors are notified of your death, they’ll likely stop trying to collect unpaid bills while your estate is getting figured out.

However, your creditors will inform the three major credit bureaus (Experian, TransUnion, and Equifax) of your death so they can prevent others from using your name to apply for credit.

You also can contact Experian directly to update a loved one’s credit report to show them as deceased and to get a copy of their credit report for probate purposes.

FAQs

1. Does debt die with you?

Not all debt necessarily dies with you. Debts may have to be paid off by the estate of the deceased, and joint debts could become the sole responsibility of the surviving partner.

2. What happens to debt when you die?

One of the tasks the executor may face after the death of a loved one is sorting out their debts. They can also work out what still needs to be paid.

3. Can you inherit debt?

The short answer is no, debt isn’t inherited in the UK. However, no-one else becomes responsible for the individual debts of the deceased, like credit card bills. This isn’t an absolute rule, however.

Final Say

Additionally, since debt often outlives the debtor, it’s a good idea to keep your debt under control while you’re living.

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