Losing a loved one is hard enough without having to deal with collection calls. Unfortunately, most debts do not disappear after someone dies. Let’s take a look at what happens to your debts after you pass away, and what you can do to protect your loved ones from your financial burden.
Mortgages and Car Notes
If a spouse or family member inherits the family home, that person is responsible for paying the mortgage. However, federal law prohibits lenders from forcing a payoff of the entire mortgage. Instead, surviving family members can continue to make regular mortgage payments.
Car notes should be paid out of the estate. If a family member inherits a car, they can usually continue to make monthly payments. Home equity loans work differently; lenders can require a full payoff immediately, which might mean selling the house if there isn’t enough money in the estate to settle the loan.
Credit Cards and Personal Loans
In most cases, credit card debt and personal loans are paid out of estate of the deceased. If there is not enough money in the estate, credit card companies and other unsecured lenders are generally out of luck. However, co-signers on a loan are usually required to repay personal loans. Likewise, joint users of credit card accounts are required to pay off any credit card debt left behind after someone dies. Someone who is just an authorized user of a credit card will not have to repay remaining debts, although they should pay off any charges they have made. One important note is that spouses in community property states may be on the hook for their deceased spouse’s credit card debt. Community property states are listed below.
- Alaska (spouses must opt-in)
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Student Loans
Federal student loans are discharged after the death of a borrower, although surviving family members must send notification to the lender. Private student loans without a co-signer are repaid by the estate. However, many private student loans require co-signers for approval. In that case, co-signers become financially responsible for the loan after the death of a borrower. In addition, in community property states, spouses may be on the hook for private student loans even if they didn’t co-sign the promissory note.
Income Taxes
Federal and state income taxes must be repaid from the estate of the deceased. A surviving spouse may file a joint tax return for the calendar year of the death of a husband or wife. If the deceased person owes back taxes to the IRS or to the state, there may be liens on various assets, such as a house. The estate is responsible for paying those liens. If the liens are not repaid, the assets may be seized. The executor or other person handling the estate should obtain legal advice immediately to deal with such circumstances.
Other Debts
Other debts a person may leave behind include child support payments, business debts, medical expenses including Medicaid or personal promissory notes. The responsibility for repaying these debts usually falls to the estate of the deceased. However, the executor or other person handling the deceased person’s affairs should consult with an attorney specializing in estate matters to determine how specific debts must be resolved.
Protecting Your Family
In most cases, when you die, your estate is responsible for settling your debts. However, your family members may find themselves dealing with probate and aggressive debt collectors. Having a will in place can protect much or all of your estate from probate. Likewise, purchasing a life insurance policy to cover your final expenses will relieve your family of the burden of paying off a mortgage, car note, credit card debt, student loans, back taxes or other expenses. Life insurance won’t eliminate your family’s loss. It will at least be relieved of the burden of paying off your debts.
