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.