Three weeks ago, over a cold glass of some Colorado craft beer. A buddy asked me “What happens to debt when you die”. Now this wasn’t a morbid question, I’ve simply just become the personal finance guy in my little group of friends, and he wanted to know what happens. Awkwardly though, my response was, I have no freaking idea. You’ll be dead, why do care?
However, this nagged at me and I’ve spent the last three weeks researching and creating a sick infographic to help him out. Reviewing articles by Nerd Wallet, US News Money and many more. I have a pretty good idea how this process of distributing wealth and collecting debt works, called “Probate”.
What’s in my Estate?
Your estate is essentially your net worth. This is made up of your home value, bank accounts, car, boat, RV and all your smaller assets as well such as paintings, flat screen tvs, etc. Essentially everything you have to your name, including your name. (source)
Your estate is everything you have, to pay off your debts first then distribute to your heirs as dictated in your Will. However some people don’t have enough money to pay off all their debt first, so I’m going to focus on what happens to your debt when you die that you can’t pay off.
Credit Card Debt – What If I Can’t Pay This When I Die?
Millions of Americans have credit card debt, so I was curious about this first. If you’re the only name on the card, the debt stops with you. So if you don’t have enough assets (money) to pay off your credit card debt. Then the Credit Card company simply has to take the loss and move on and your heirs aren’t responsible for paying it off. (source)
They can though, go after a “co-signer” on your credit card. So always be careful of co-signing anything. However, if you’re just authorized to use the credit card, you’re not liable to pay off the debt because you’re not the actual owner of the credit card and don’t carry the financial liability.
Student Loan Debt – What If I Can’t Pay This When I Die?
If your estate can’t cover your student loan debt, then that’s where the buck stops. Unless you had a co-signer on the account, no one else including your heirs, are responsible for that debt.
It was interesting to hear though that according to Nerd Wallet, collection agencies may still legally contact your family members to “discuss” student loan debt, but they can’t mislead your heirs into thinking that they’re responsible for your student loan debt (source). Not sure why they would do this unless they were trying to guilt your poor grandma into paying off your student loans for moral reasons. Those bastards. Be sure to send them a letter asking them to stop and request a read receipt.
Car Loan Debt – What If I Can’t Pay This When I Die?
This was interesting. If your estate can’t pay off your car loan debt then they can repossess your car. This makes sense, it’s a tangible asset that can be taken back if not fully paid off. How I paid off my car.) However whoever inherits the vehicle can just continue making payments on their inherited Ford Fiesta and the bank is unlikely to take any action as long as they continue to receive money. Remember it’s all just business. (source)
Home Loan Debt – What If I Can’t Pay This When I Die?
This is really the least of my concerns since I rent a studio loft downtown, but for some friends who recently bought a house, let’s chat. Due to the 1982 federal law, the surviving spouse may continue to make payments to the mortgage without having an issue (source). They can simply continue to make payments similar to how the recently deceased did or sell and keep the difference in monetary value.
Things get a little murky with mortgages with a “home equity line of credit”. These are usually paid off during the probate process but may involve selling the house if your assets don’t cover the debt. If you’re worried about this, I highly recommend you consult a local attorney.
Is anything safe from debt collectors?
In my research, I’ve found a few things that appear to be safe from debt collectors. These are IRAs, 401(k)s, brokerage accounts, life insurance and pension plans that don’t go to probate, so they won’t be considered a part of your estate to pay off debt collectors. So your heirs may be left with something. (source)
Sometimes people get life insurance to help their loved ones (often co-signers) with the debt they leave behind. Since life insurance is exempt from some estates, it can be used by your heirs and loved ones with the burden of any debt you accumulated together.
In short, your debt belongs only to you, it is not passed on to your family when you pass. (source). As long as you didn’t have any co-signers for your Student Loans/Credit Card Loans and your estate can’t pay them, those debts die with you. Home Loans and Car Loans are tangible assets that can be taken back if not paid off or have someone take over the payments in order to keep them.
If this research taught me anything, it’s to be very aware of what I co-sign. Debt dies with the deceased, unless there’s a co-signer.