What Happens to Your Debt After You Die?
The repayment rules for credit cards, mortgages and other loans
Many families worry that the death of a loved one will mean that his or her debts will then become the legal responsibility of the surviving relatives. But that isn’t necessarily the case.
Below, answers to key questions that you may have about who will and won't be on the hook for any debt you owe — mortgages, home equity lines, car loans, credit cards, student loans and the like — after your death.
If I die with debt, will my family owe it?
That depends. There are certain circumstances in which your family would have to pay the debt, but unless you fall into one of those scenarios (which will be discussed in a moment), they won’t have a legal obligation to do so.
What happens to my debt when I die?
Generally, the estate owes the debt. If there are enough assets to cover the outstanding debts, the executor (the person who orchestrates the probate process and is in charge of paying the creditors) must sell them to pay the creditors who file a claim on you.
But if there isn’t enough money in the estate to pay the debt, then the debt typically dies as well. Creditors must then write off the remaining unpaid debts.
Is anything safe from debt collectors looking for money to be repaid?
In most cases, accounts with beneficiaries such as IRAs, 401(k)s, brokerage accounts, insurance and employer-based pension plans won’t go through probate, so they won’t be tapped to pay your debts.
However, laws regarding what’s safe from debt collectors during probate vary from state to state. Talk with a lawyer to learn the rules in your state.
Will my surviving spouse be responsible for our home mortgage after I die?
Due to a 1982 federal law, surviving spouses can take over a mortgage on a home without having to immediately pay the remaining balance in full.
Note: if your spouse plans to take over the mortgage, he or she will need to show creditworthiness and the financial capability to keep up with payments.
What about a home equity line of credit?
Typically the executor will try to pay down a home equity line during probate, which may involve selling the house.
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If you and your husband or wife filed for this line of credit together, though, your surviving spouse will most likely need to refinance and prove an ability to make the payments. Otherwise, the lender could cancel or freeze the loan or foreclose on the home to pay for it.
This process may vary according to which state you live in, so consult a local attorney.
What about other debt, such as credit cards, student loans and auto loans?
However, if your spouse co-signed any of these, he or she will be legally responsible for repaying the debt.
Merely authorized users on credit cards won’t be responsible for unpaid charges and interest, though, since they don’t carry the financial liability a co-signer does. The cardholder’s death might, however, lead to problems for an authorized user; this Daily Finance article noted the case of a man whose credit rating was damaged when creditors reported to credit agencies unpaid debts related to his late mother’s account where he was an authorized user.
Community Property Laws
Now here’s the big caveat to all of this: 10 states have community property laws that could significantly affect your spouse after your death: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin (In Alaska, this is the case only if couples opt in).
Under community property laws, any assets and debts that one spouse acquires after the start of a marriage belongs to the other as well. For example, if you open a credit card only in your name once you’re married and die without paying it off, your spouse will be legally responsible for paying the remaining balance in a community property state.
Debt Collectors After Your Death
Unfortunately, after you die, unscrupulous debt collectors may decide to pursue your spouse for your unpaid debts. Surviving spouses may get calls saying the debt should be repaid for moral reasons, with the debt collector trying to guilt him or her into paying.
A few years ago, The New York Times cited the case of one debt collection firm that put relatives in touch with grief counselors, thinking descendants would be more likely to pay the money after receiving emotional help.
Unless there’s truly a legal basis for contacting a survivor, though, your former spouse shouldn’t be intimidated if a debt collector calls. Instead, he or she should write a letter (sent by certified mail, asking for a return receipt) to that company clearly stating that they don’t wish to be contacted again.
Steven Richmond is a freelance writer who formerly worked as a government and business reporter and as Editor-in-Chief of BadCredit.org and CardRates.com.