What happens to my debt when I die? Does it just go away? Or will my family be responsible to pay it for me? The answer depends on a few factors, including the type of debt, if you have any assets when you die, and if you’re legally married or not.
We generally don’t like to dwell on the fact that we all will die eventually. However, if you don’t make proper arrangements for your debts and assets after your death, you might leave behind a mess for your loved ones to clean up.
What Happens to my Debt When I Die?
In part one of this series, I talked about what happens to your money and other assets when you die… But what about your debt: mortgage, car loan, credit cards, medical bills, and student loans? Read on to find out!
What Happens to My Mortgage When I Die?
If you own a home jointly with your spouse, the house or condo transfers to your husband or wife They will be responsible to continue paying any debt associated with the property, whether it’s a mortgage or home equity loan. Typically, both spouses’ names are on the deed to the property and the loan. As long as the surviving spouse continues making the payments, nothing really changes.
What if your spouse can’t afford the current mortgage payment because of the loss of your income? He or she will either have to refinance the loan, or sell the house and buy something more affordable. This is why I recommend you have sufficient term life insurance on both spouses so the surviving one is able to stay in the home.
What if you own a home with a mortgage, but you’re not married? Well, you better have a will or estate plan that designates the beneficiary of your property, so it doesn’t go into probate. Typically, your heir decides whether or not they want to sell the property. If the person wants to keep it, and there’s a balance on the mortgage, he or she will be required to pay it off. If your heir decides to sell it, once the real estate commission and the mortgage is paid, the person will receive the remaining money as their inheritance.
The process is very similar for loans on cars, motorcycles, boats, ATV’s and the like.
What Happens to My Credit Card Debt When I Die?
If you have credit card debt when you die, your estate is responsible to pay it. This means if you have any funds in your bank accounts, they must be used by your heirs to pay off your debt. If you’re married and your spouse is already listed on your accounts, they will be responsible to continue paying on them.
If you’re not married and there isn’t any cash available to pay off your credit card debt, the bank is generally left holding the bag. According to CreditKarma, “Family members of a deceased person are typically not obligated to use their own money to pay for credit card debt after death…”
This happened when my mother-in-law passed away several years ago. There wasn’t enough cash in her bank account to cover her credit card bills. As her financial power of attorney, I sent copies of her death certificate to each of her creditors along with a note explaining that she didn’t have any assets in her estate to pay them.
However, if you have a co-signer on a particular credit card, that person becomes solely responsible for paying the debt. This is one of the many reasons I strongly caution against co-signing credit cards (or any other loan), even for a family member.
What Happens to My Student Loan Debt When I Die?
As you might already know, student loans are exempt from bankruptcy, so the only way to get rid of them is to pay them off. But what happens if you die and there’s still an outstanding balance on your student loan?
According to The Motley Fool, “If you have a federal student loan, then the federal government will discharge any remaining debt upon your death. That means your balance will get zeroed out, and your loved ones won’t have to repay the student loan after you die.” Private student loans, on the other hand, are not required to discharge the balance if you die and will likely move to collect from your estate.
If you are married, most states do NOT allow lenders to collect student debt balances from surviving spouses, even if the loans were taken out during the marriage. But if your husband or wife cosigned on your student loan, that’s an entirely different story.
If you have a cosigner on your private student loan, the person may be required to pay your balance when you die. Some lenders do take compassion on the family of the deceased and voluntarily release the cosigner from the responsibility of the student loan. (But I have a feeling that’s the exception to the rule.)
What Happens to My Medical Debt When I Die?
If there isn’t enough money in your estate when you die to cover medical bills, they typically go unpaid. If your loved one signs as a responsible party for a medical treatment or a procedure, the provider will likely pursue them for payment if you die and leave the debt unpaid.
Years ago, when I worked as an HR manager for a manufacturing company, one of my employees received a paycheck garnishment notice for tens of thousands of dollars. This person cosigned for an experimental cancer treatment for their mother, in hopes it would save her life. Unfortunately, the treatment didn’t work and the mother passed away.
The employee ignored the bills for several years, thinking the medical facility had given up hope of collecting. However, the provider took the case to court and received a judgment against this employee. That person ended up with a 3-year garnishment of several hundred dollars per pay check until it was paid in full.
Here’s the bottom line: excessive debt is bad news all the way around. Now you know the answer to the question “What happens to my debt when I die?” It’s important to know what types of debt you have right now and how it could affect the family you leave behind when you die.