Debt After Death

What Happens to Debt When You Die?

According to the U.S. Census Bureau the typical American household carried an average of $137,063 in debt in 2017. It is a common goal for many to one day live debt free although sometimes it takes a lifetime to be clear of. What happens if time runs out before the debt can get paid off in its entirety? What happens to debt when you die? Are beneficiaries responsible for debts left by the deceased? 
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Firstly, debt does not disappear when you die, but there are a couple different ways in which your debts can be handled at the time of your passing. Your estate is everything you owned at the time death and is responsible for your debts once you pass. What is included in your estate? Everything that can be seen as having value in the eyes of a creditor. This includes real estate, vehicles, jewelry, art collections, antiques, investments, insurance and anything else considered to be an asset. What if there is not enough in an estate value to cover the amount of debt a person has or there is no estate at all? This is where life insurance comes in. A life insurance policy works like any other where a person is insured for a certain amount of money in exchange for a re-occurring payment to keep the policy active. A life insurance policy is usually used to provide the dependents of the deceased with money in the event of their death, but it also is used to pay off any outstanding debts. 

Typically, no one else is responsible for someone else’s debt when they pass, however there are a few exceptions in which this is not the case. Co-signers, joint account holders, and in some cases, even spouses will be required to take on the debt of the deceased. Whether or not a spouse must take over payment of a debt is dependent on state law. For example, in a community property state, a spouse may be instructed to use community property to clear a specific debt of the deceased spouses.

Does the type of debt matter at the time of death? How does real estate debt and credit card debt differ? We cover what happens to four different types of debt when you pass below. 

Credit Card Debt

Credit card debt after death is considered to be a personal loan. Unless there is a co-signer, as mentioned above, the debt is the responsibility of the estate or life insurance policy. If there is no money in the estate for this debt to be covered then the lenders are at a loss however it is important to keep in mind that debts are usually the first things to be cleared before anything is given to the beneficiaries. 

House Debt

When a mortgage is borrowed, the home is used as collateral. If the payments stop in the event of a death the lender could sell the house and use the profits to cover the remainder of the debt owed to them. Though the lender has the ability to do this, there is usually the ability for another person to take over the mortgage payments to keep the house in the family. 
Car Debt
Vehicle debt acts similarly to a mortgage in that the vehicle is used for collateral for the loan but payments can be taken over by someone else. 
Student Debt
Federal student loans are sometimes forgiven in the time of a death as the debt is unsecured and consumer friendly. On the other hand, private student loans act more like a personal loan where the lender can set the terms however they would like so there is more of a chance this will need to be paid off using the estate or life insurance at the time of death.
If a creditor or debt collector is claiming that you are to take over the debt of a deceased family member or even friend it is important to reach out to a lawyer to confirm whether or not you have a responsibility to those debts. 
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