The Truth About Debt and Death
Ever worry about having to pay a deceased family member’s debts or wonder who will pay yours? Laura gives you the facts (and peace of mind) about debt and death.
Laura Adams, MBA
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The Truth About Debt and Death
When you die, there’s typically a lot of unfinished business to figure out—and some of the rules may surprise you.
If you’ve ever worried about having to pay a deceased family member’s debts or wondered who will pay yours, this post will give you the facts about debt and death, and hopefully put your mind at ease.
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What Is an Estate?
After you die, everything you leave behind becomes a legal entity called your estate. What happens to your estate depends on whether you die with or without a last will and the state where you lived.
Every estate must have someone who puts things in order, called an executor. He or she distributes your property, pays your outstanding bills, and settles your debts. I strongly recommend that you create a last will and name someone in it who you trust to be your executor.
If you don’t, the court will appoint an executor to handle your affairs for you. Just remember that it probably won’t be someone you know and they may not carry out your wishes the way you would have liked.
The executor’s job is to protect your assets, such as your home, household belongings, vehicles, bank accounts, and investments, and to pay your liabilities or debts, such as mortgages, credit cards, loans, and taxes.
See also: 4 Legal Documents You Should Have
What Happens to Debt When You Die?
If there isn’t enough cash in the estate to pay what’s owed, the executor must sell as much of your property as possible. For instance, if you don’t have enough to pay off a credit card, your car could be sold to raise money.
However, in most states, certain assets, such as your retirement funds, are safe from liquidation to pay creditors. If you name your spouse or child as the beneficiary of your 401k or IRA, they would receive the money, even if your estate were insolvent.
After all debts are paid, the executor distributes the balance of the estate’s assets to the beneficiaries as spelled out in your will, if you have one. For instance, let’s say you have a home with a mortgage and your will says that it goes to your sister. If you die and she accepts the property, she would also be responsible for making the mortgage payments going forward.
If there isn’t enough cash or property to cover your debts, then your creditors are generally out of luck.
A federal law called the Garn-St. Germain Depository Institutions Act allows a close relative who inherits a property to assume payments on the mortgage without triggering a due-on-sale clause. In other words, your sister could title the home in her name and make payments, even if the mortgage remains in your name after your death.
But what if there are more debts than assets in the estate and some creditors can’t be paid off? If there isn’t enough cash or property to cover your debts, then your creditors are generally out of luck.
If debt is in your name only, creditors can’t go to your family, friends, or heirs to collect it. Likewise, you’re not responsible for other people’s debt, except in certain situations, which I’ll cover in a moment.
Creditors also can’t go after property or cash that goes directly to someone else when you die, such as the beneficiary of your life insurance or retirement account.
All consumers are protected by the federal Fair Debt Collection Practices Act, which prohibits collectors from using abusive or deceptive tactics to try to collect a debt. Even though it’s illegal for creditors to collect a deceased person’s debts from someone who isn’t responsible for them, they may try.
Creditors have a limited period of time, such as up to 6 months, to make a claim against an estate. If it has no money, creditors have been known to prey on relatives in hopes that they’ll feel duty-bound to pay up. Remember, it’s the deceased person’s estate that is typically responsible for debts, not you.
I say typically because there is an exception known as filial responsibility that applies in 29 states and Puerto Rico. It may require adult children to pay for a deceased parent’s unpaid medical debts owed to a hospital or a nursing home, when the estate can’t cover them. Even though filial support laws have been largely ignored, court decisions in recent years indicate a renewed interest in enforcing them.
Who’s Responsible for Co-Signed Debt When You Die?
Even if you never charged a dime on a joint credit card or didn’t drive a car with a co-signed loan, you’re still legally responsible for 100% of the debt—not 50% of it.
Now let’s discuss what happens to co-signed debts when you die. Let’s say you co-signed a joint credit card with a boyfriend or a car loan with a parent. The death of a co-signer does not eliminate your obligation to pay a debt.
Even if you never charged a dime on a joint credit card or didn’t drive a car with a co-signed loan, you’re still legally responsible for 100% of the debt—not 50% of it. That’s why co-signing is a serious decision that you should never take lightly.
One terrible situation that many people don’t think about is co-signing a student loan with a child who dies. In that case, the parent would be obligated to pay off their deceased child’s entire loan.
A smart solution to protect your finances is to get an inexpensive term life insurance policy on the student. That would give the parent a payout and insure that a co-signed loan could be paid off in full.
I also want to clarify the difference between owning a credit card and being an authorized user on one. A user can have a card in his or her name but has no legal responsibility for the debt. For instance, if you’re an authorized user on your dad’s credit card and he passes away, you’re not responsible for the debt, even if you made loads of charges.
So make sure you’re clear about your card ownership status if a debt collector comes knocking. Unless you’re a co-signer on someone’s account, his or her credit card bills are not your problem.
See also: What Happens to Credit Card Debt When You Die?
What Happens to Debt When a Spouse Dies?
Being married makes the issue of debt and death much more complicated. It depends on whether you live in a common law or a community property state.
Even if your spouse had a secret credit card that was in his name only, you’d generally still be responsible for the debt after his death in a community property state.
The 9 community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In Alaska, spouses can choose to opt in to the community property system.
In community property states, money earned and property acquired by either spouse during the marriage is owned equally by both of you. Likewise, your debts are shared. So, even if your spouse had a secret credit card that was in his name only, you’d generally still be responsible for the debt after his death in a community property state.
But property and debt that you owned before the marriage are not considered community property. For instance, if you took out a student loan before getting married, your spouse wouldn’t be responsible for it if you died.
Also, you can sign a legal document like a pre- or post-nuptial agreement that separates some or all of the community property you own.
As I mentioned, common law applies in the rest of the states, where it’s easier to tell which spouse owns what assets and liabilities. In general, earnings and debts incurred by one spouse do not become jointly owned.
However, debts of one spouse in common law states do become the responsibility of both spouses if the money was used for the benefit of the marriage or family. For instance, one spouse used credit card debt to pay for housing, food, or childcare.
But if a deceased spouse’s name is on a credit card that you didn’t know about or on a car loan and title, you likely wouldn’t be responsible for it. However, how debts are treated can vary slightly even among common law states. There may be some instances where you could be responsible for one half of a debt owed by a deceased spouse, instead of the full amount.
5 Truths About Debt and Death
To sum up, here are five important truths about debt and death:
Truth #1: Family and friends don’t inherit debt.
With only a few exceptions, such as being a co-signer and the filial responsibility laws for medical debt that I mentioned, family members are not responsible for a deceased person’s debts.
Truth #2: Authorized credit card users have no responsibility.
Unlike a co-signer, being an authorized user on a credit card means that you’re not liable for the primary cardholder’s debt.
Truth #3: Community property states are different.
If you’re married and live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin, and if you choose it, Alaska), you can be liable for your spouse’s debts, even if you didn’t agree to them or know about them.
Truth #4: Some creditors may not be paid.
When a deceased person leaves more debts than assets in an estate, creditors may not get paid.
Truth #5: Debt collectors can’t harass you.
If you’re not in charge of an estate and get contacted by a collector for a debt that you don’t owe, you can tell the caller that you don’t want to be contacted about that debt again.
If you ever need help planning or managing an estate, be sure to contact an attorney to get help.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.