What Happens to Your Debt when You Die?
When people think about their estate, they tend to think of the assets they will pass on, like their stamp collection, a home or vacation property, and of course, their money. However, it’s important to consider your whole balance sheet – including your debt – when thinking about what you’ll leave behind for your loved ones when you die.
Whether or not your family will be saddled with your debts when you die depends on the type of debt and who else may already be responsible for it.
The most common debt we come across when someone dies is credit card debt. If the credit card belonged to the decedent, and the decedent alone, only their estate is responsible for paying it. If there are assets in the estate to pay it, and the creditor goes through the correct process, then it will be paid from the estate. However, there are statutory protections in place to ensure that any debt won’t eat up all of someone’s estate, and in some cases it is possible to avoid paying it altogether.
If someone was a co-account holder on a credit card, then the debt no longer belongs to the decedent, but the debt now belongs fully to the surviving co-account holder. An authorized user is different from a co-account holder. Both can use the credit to make purchases, but an authorized user does not take on the debts when someone passes away.
Debts like car loans and mortgages are treated differently because they are “secured” debts. Meaning, if you don’t make the payments, the bank has something to come and repossess, e.g., a car or a house. Typically whoever is getting the thing that the debt is secured by will also need to take on the debt attached to that item. If you leave your car to your children, and you still owe money on the loan, then your children will need to enter into a new agreement with the finance company and will have to start making those payments. The same is true with real estate.
A well thought out estate plan considers your debts as well as your assets, and mechanisms can be put in place to make sure your loved ones are left with something, rather than your debt when you die. For more tips, check out our ten essentials for a comprehensive estate plan.