What Happens to Your Debt When You Die

Many of us will pass on with debt of one form or another – credit card debt, mortgages, or other borrowings. When we die, what happens to this debt? Will our loved ones, our spouses and families, be responsible for paying it off? Can debt collectors seize the assets our dependents are relying on? The answer can be complicated.

First, and most importantly, it is your estate – the sum of all your assets (like your house and savings accounts) that is responsible for your debt, whether you are alive or not.

Second, although your other relatives are generally not responsible for your debt, depending on state probate law your spouse may bear some obligation to repay your debt.  In general, if your relatives did not co-sign, are not specifically named on a bill or debt obligation, or do not live in one of the ten community property states (Alaska [opt-in], Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), then they are not a responsible party for your debt.  It is critical that you consult an attorney familiar with the probate laws of your state to understand the obligations your loved ones have to the debt of your estate.

Third, debt collection efforts should be handled in an orderly fashion through a court process known as “probate”.  Every state has a different probate process, but generally the estate is liquidated and proceeds are paid in the following order of priority:

  • First, any court costs, legal bills or other fees associated with the probate process must be paid,
  • then any secured debt like a mortgage or unpaid taxes or auto loans,
  • then any uncovered funeral expenses,
  • then any unpaid medical bills such as hospital stay, hospice, doctors visits etc.,
  • then some amount is paid to the remaining spouse and any minor children,
  • then any unpaid wages to employees (if any) of the deceased’s estate
  • and then all other debts (unsecured, like credit cards)

As you can see, by the time the secured debt, funeral expenses and medical bills are paid, there may be nothing left for your family. How can you protect them and ensure they have adequate resources to survive on if you pass away?

First, you should be prepared to manage the probate process on behalf of your surviving family members. To do this, you must have a will outlining how to handle your estate, and a personal representative (whether they are related to you or not) who is responsible for managing your estate through the probate process.

Second, you should make sure you have enough life insurance to cover the obligations of your estate and ensure your family will remain financially secure in the event you pass away.

*The material provided in this article is for informational purposes only.  We do not provide legal, tax or accounting advice.  Please contact your own advisers for legal, tax and accounting advice.