What Happens to Your Debt When You Die?



No one likes to talk about it. But one day, your time here will end, whether you’re prepared for it or not. For the sake of your loved ones, then, it’s best that you are prepared.

As it is, 73% of American consumers leave debt behind when they die, according to data reported by Experian in 2016. The average amount of debt owed by each of these consumers at their time of death was $61,554. What all this means for you is that, when you pass, you are likely to be tens of thousands of dollars in debt as well.

But what happens to your debt when you die? Is it simply canceled?

Not at all: the debt remains until it is paid. One way or another, these accounts must be settled.

To learn more about how this works and why, and what you can do about it, continue reading this guide.

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What is Debt?

Surely you’ve heard it said, “Debt is an asset.” And that’s entirely accurate.

It’s commonly believed that your debt, along with your money, property, possessions, and all your other assets, pass to your next of kin. This is sort of true.

The collection of assets you leave behind is known as your estate. However, the various debts in your name don’t exactly pass to your next of kin. They pass to your estate.

How Is the Debt Collected?

So, attempts are made to collect this debt from the other assets in your estate before the estate is distributed to your next of kin. For example, if you owe $60,000 upon death, but you owned a house worth $160,000 the house may be sold to pay off the debt. The remaining $100,000, and all other assets in your estate, are passed down according to your will.

Is It Fair to Collect This Debt?

The thought that this debt is collected from the estate you leave your next of kin upon your death brings up questions of fairness. That is, it may seem unfair to take even more from those who have just lost a loved one, especially when funeral expenses are considered.

The truth is, though, it is exactly fair. You made a promise to all your lenders and creditors, and a legally binding one at that. They allowed you to borrow their money on condition that they’ll be repaid in full, plus any interest you’ve agreed to.

It wouldn’t be fair at all if the lenders and creditors of the world lost everything they’re owed every time someone dies, would it? They deserve the money that was promised to them. And so these accounts must be settled.

Are There Any Debts That Won’t Pass to Your Estate?

As always, yes, there are exceptions to this rule. Debts will only pass to your estate if they are in your name and your name alone. Any debts you share ownership of at the time of your death will pass to the other name(s) on the account.

This applies to loan cosigners and joint account holders with whom you share a credit card. It does not apply to anyone who is merely an authorized user on your credit card account. Although, some states pass certain debts, like mortgages and credit debt, to the surviving spouse.

Who’s in Charge of Distributing Your Estate?

So who makes all the decisions regarding what assets are used to pay off creditors? You can appoint this person yourself in your will.

They are known as the executor. They handle the business of selling your assets to pay off your remaining debts, as well as any other financial decisions regarding your estate.

What If You Didn’t Leave a Will?

Dying without a will is called dying intestate (as opposed to dying with a will, which is called testate.) Typically, when you die intestate, one or more family members will apply for the position of executor.

In intestate cases, though, they’re sometimes known as an administrator rather than an executor. But the role is essentially the same. They will handle the paying off of debts and the distribution of assets.

If no one moves to become executor/administrator, the court/state laws will usually decide what becomes of the estate. Often, the assets will be considered abandoned and/or seized by lenders to pay off debts.

What Happens If the Estate is Insufficient to Repay the Debts?

Sometimes the amount owed to lenders and creditors outweighs the value of the remaining estate. What happens when the entire estate is spent and it’s not enough to cover the debt? That depends on state law as well as the type of debt that remains.

Here are a few situations that fall into this category to shed some light on the topic.

Secured Debts

Some debts, like mortgages and car loans, are secured against some type of collateral. A car loan, for example, is secured against the car.

In the event that the loan cannot be repaid, the relevant collateral (in this example, the car) is repossessed. The debt is then settled since repossessing the car counts as repayment of the debt.

As such, secured debt will be settled the same way upon your death. If they can’t be settled by the value of the other assets in your estate, the relevant collateral will be repossessed.

The most common problem with this is when there are other people living in the house that is owed. In this situation, the inhabitants must either take over the mortgage, sell the house, or relocate before the bank forecloses.

Unsecured Debts

Other debts, like credit card debt, are unsecured. This means the lender or creditor might be out of luck if your estate is unable to pay off the balance owed.

Such lenders do have a right to repayment via your estate. But, once the estate is spent, they have no further recourse to pursue repayment.

There is nothing left to repossess. And the debt is in your name so it can’t pass to anyone else. In this case, the lender or creditor will just have to take the hit.

But, remember: an unsecured debt can still be inherited if someone else was co-owner of the account. Also, in community property states, unsecured debts pass to a surviving spouse if they were incurred during the marriage.

What Can You Do?

By now, given this knowledge, you should already be asking yourself what you can do to prepare for this day. Fortunately, the answer is, “A lot.” To prevent debt from causing trouble for your surviving family, take these steps now.

Get Life Insurance

The smartest, best, and most important thing you can do right now is to get life insurance. With even the most basic life insurance plan, your family receives at least a few thousand dollars upon your passing.

But, considering how affordable life insurance is these days, you should really invest in a more substantial plan than the bare minimum. Aim for a plan that at least covers your current debts.

This lets you pay any outstanding debts before they’re taken from your family’s inheritance. It also prevents these debts from becoming your family’s inheritance. If there is any leftover, it can prevent your family from accruing debt due to funeral expenses.

Get a Will

Next, plan, write, and legalize your final will and testament ASAP.

Remember: when you die, your debts will be settled and all your possessions distributed. This will either happen according to your will or someone else’s. If you want any say at all in what happens to your family and your estate when you die, you need to make such arrangements while you’re still alive.

So, first, think of who to be your executor and get it notarized. If you get nothing else written in your will, at least make sure you name your executor.

Next, list any specifics you had in mind concerning your belongings and the persons you wish to bequeath them to. That will make these possessions last on the list to be used to pay off debts. This, of course, excludes any collateral that lenders have a legal claim to.

Get Out of Debt

Lastly, another sure way to avoid leaving debt is to not have any. If you know you have a problem incurring debt, take a moment to think of how it will impact your family when you die. This might motivate you to get serious about achieving financial freedom.

Take some time to research how to make wiser financial decisions. Also, check out how you can reduce debt.

Some examples include avoiding frivolous spending, living below your means, and paying more than the minimum payment on your credit cards.

What Happens to Your Debt When You Die?

Now that you know what happens to your debt when you die, your family won’t have to bear this burden alone. It’s up to you, right now, to ensure they’re taken care of when that day comes. To that end, take the above steps to make the necessary preparations.

To learn more about protecting your family’s future, read, What Types of Insurance Should You Have?