Dying in Debt: Can You Take It With You?

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Think your debts are wiped out when you die? Think again. If you're not careful, you could stick your survivors with a big bill.

Life can be complicated. And as it turns out, death isn’t so simple, either – at least not when it comes to settling your debts.

When you die, your family doesn’t “inherit” your debt. What essentially happens is that the instant you shuffle off this mortal coil, a new entity is simultaneously born: your estate. “Estate” is just a fancy name for your assets (stuff you owned) – and your liabilities (stuff you owed).

Let’s explore how this works by looking at a few common debts and methods of ownership.

Debts in your name alone

You might think that your credit card company knows everything about you. But when you die, your bank doesn’t get a memo. It just notices your bill is overdue and eventually passes it along to the collections department.

When you’re gone and your estate shows up, it becomes the responsible party for your credit card or other debt. If there’s sufficient money or other property in your estate to settle your debt, that’s what happens: The person who serves as your surrogate – your personal representative or executor of your estate – pays the bill. But what if there’s no money, or not enough to pay the bill? You’re in luck – well, except for the part about being dead.

According to MasterYourCard.com

This is one instance where the credit card company doesn’t always win and sometimes they just have to suck it up. If the account was a sole account in the deceased person’s name only, then it is their sole responsibility and the debt is not passed on to their heirs and family members.

So when you die, the debt bypasses your family and goes straight to your estate, which is responsible for paying it. If you died broke, or there isn’t enough money left over for all the creditors lining up for their share, then your estate is declared insolvent – and your creditors have to write off your debt.

Joint accounts

Now the bad news. As CreditCards.com explains…

One situation in which someone else could end up shouldering your credit bill: If you share the account. If a spouse, family member, or business partner signed the card application as a joint account holder, then that person could be liable for the balance on that card, along with (or instead of) the estate.

The same goes for married couples have joint bank accounts – and joint debt. Your surviving spouse might be legally responsible for the debt, even if you’re the one who rang it up. If the debt is in your name alone, however – in other words, you’re married but applied for the debt completely on your own – your spouse may not be liable for it. Unless, that is, you live in a community property state.

These states make it possible for your debts to pass onto your spouse:

  • Alaska
  • Arizona
  • California
  • Idaho
  • Louisian
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Here’s how the Law & Daily Life blog explains it…

Such “community property” is liable for debts incurred by either or both spouses during the marriage (regardless of personal liability). Should a spouse pass away, creditors in such states may have options, both inside and outside of probate, to try to attempt to recover for the debt.

That doesn’t necessarily mean your spouse will get stuck with the bill, but it makes it a bigger possibility.

Secured debt

You also need to watch out for secured debts – loans that are secured by an asset such as a house or your car. You might think you’re doing a family member a favor by leaving them your car, but as LegalZoom points out, you need to be careful…

In the case of secured debts, property can be distributed with its debt. In other words, let’s say you have a car worth $10,000 and have a $5,000 loan on the car. You can leave the car to someone, but it will be that person’s obligation to pay off the loan.

So if you’re planning to leave someone an asset with loan attached, the nice thing to do would be to also leave them enough money to pay off the loan. If that’s not possible, then they may have to sell the asset to satisfy the lien, because it’s not going to be wiped out in the event of your death.

Co-signed accounts

What happens if you co-sign a debt for someone who dies? Unfortunately, in many cases you could be paying the bill. A co-signer agrees to pay the debt if the original borrower can’t. So whatever the reason, if the primary borrower doesn’t pay, the co-signer may have to. This isn’t always true: For example, federal student loans are typically discharged by death, but private student loans may not be (see this recent article from the Wall Street Journal). So it can depend on the specific loan. But in general, this is one of many reasons that co-signing any loan can be a really bad idea.

What you can do now

No matter how old you are or how much you have, if you’re an adult, you should have a will. A will is simply a list of instructions that lets those you leave behind know what you wanted done with your body and your stuff. It will be read by a judge in a process known as probate, and providing your wishes are legal (no, you can’t have yourself stuffed and propped on your favorite bar stool) it will be followed.

Getting a will doesn’t have to be complicated or expensive: see our story 3 Ways You Can Get a Will. And it’s important, even if you think you don’t own enough to make it necessary. Because without a will, everything you have is going to your nearest relative – do you really want your mom to inherit your vintage Penthouse collection? – and that person will also be responsible for settling your debts and taking care of all the loose ends you leave behind.

So a will offers you the opportunity to put your possessions into the hands of those you’d like to have them, and could save your family a lot of hassle. If you don’t have one, get one.

Stacy Johnson

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