What Happens to Debt When You Die?

Most of us will die with some debt. Most common are mortgage loans, automobile loans, credit card debt and medical bills. So what happens to this debt when someone dies? Well, it depends on your state law, whether you’re married, and what your other assets are.

If you’re married and live in a community property state;

(Currently there are 9 community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.)

In community property states, married couples own all property and owe all debts equally.  The surviving spouse becomes responsible for his or her partner’s debts after death.  (Even if the surviving spouse didn’t co-sign or guarantee them.) But only debts that occurred during the marriage are the responsibility of the surviving spouse.

For those unmarried or not living in a community property state;

Joint Accounts

It’s common for unmarried couples to have a mortgage together. Or for a parent to co-sign for a mortgage, automobile or other types of loans.  With these joint account situations, the survivor (co-signer) is responsible for that debt.

If the survivor is only an “authorized user,” on a credit card, (not a joint account holder) he or she is not responsible for that debt.

Probate

Probate is a legal process which is necessary to transfer ownership of the deceased’s assets to their heirs or beneficiaries.  The probate process also pays the debt. Debts are paid before the remaining assets are transferred to beneficiaries. 

One of the first steps of the probate process is to notify potential creditors. Creditors must then make an official claim for payment of the debt owed.  Failure to respond means they don’t get paid. If the estate doesn’t go through probate, and if no one else co-signed or guaranteed a debt, creditors may not receive payment. Once all the known debts are satisfied, the family will inherit any left over money.

Sometimes Debts Can’t Be Paid

Sometimes there are more debts than assets. When this occurs, the estate is insolvent. The executor of the estate (the person who manages the probate process) must sell off or liquidate assets to pay the creditors as much as possible. Certain debts may receive payment first, depending on state law. In most states, some assets, such as retirement account funds, are safe from liquidation to pay creditors. If there’s no money left in the estate, creditors don’t get paid.

Planning your legacy can be complicated. Debt is a very real component in that planning. Make sure you understand what debt you have, who will end up being responsible for that debt, and how that might impact what you leave for your loved ones.

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