Ask Stacy: What Happens If I Die With Debt?

Photo (cc) by Nicholas Ortloff Photography (Is Back)

If you die with money and possessions, everything is distributed based on your will. But what happens when you die in debt?

Here’s this week’s question:

Dear Stacy,
I’m a single woman with no kids who is actively and aggressively trying to pay off my debt. I have a few health issues and worry sometimes about leaving this life without being debt free. My credit cards (from my stupid 20s) are paid off, and I’m now working on paying off my car loan, student loans and my mortgage. What happens if I pass away with debt? My father is still living, as well as my three siblings. Do they get stuck with my debt? I have a life insurance policy; it’s not very big. Does that go towards paying my funeral expenses or my debt?
Thanks in advance,
Zepher

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 estate is born

When you die, your family may inherit your Beanie Baby collection, but they don’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 word for your assets, or stuff you owned, and your liabilities, or stuff you owed. If your assets exceed your liabilities, your estate has a positive net worth. If they don’t, it doesn’t.

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

Debts in your name alone

You might think your credit card company knows everything about you. But when you die, your bank doesn’t automatically 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 is born, it becomes the responsible party for your debts. The person serving as your surrogate, known as a personal representative or executor, gathers your assets, sells your stuff, pays your bills and distributes anything remaining to your heirs. If your estate owes more than it owns and there’s not enough to pay the bills, unsecured lenders, like credit card companies, just have to suck it up.

When I notified my father’s bank that he’d died, shortly after expressing their condolences, they began calling, writing and otherwise requesting the full payment of his credit card balance. They also implied I should pay it, since I was his nearest living relative.

This is not uncommon, but it is despicable. My father’s estate was responsible for his debts, not me. You’re less likely to run into something similar these days, because the FTC has since issued guidelines for debt collection from decedents’ friends and relatives. Here’s what they say:

… family members typically are not obligated to pay the debts of a deceased relative from their own assets. What’s more, family members — and all consumers — are protected by the federal Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using abusive, unfair, or deceptive practices to try to collect a debt.

In short, if an unsecured debt is in the deceased person’s name only, the debt is not passed on to heirs and family members. It’s owed only by the estate. If you die broke, or there isn’t enough money left over for all the creditors, they lose and you win. Except, that is, for the part about being dead.

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 who 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 on to your spouse:

  • Alaska
  • Arizona
  • California
  • Idaho
  • Louisiana
  • 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 car. You might think you’re doing a family member a favor by leaving them your car, but if there’s a loan on it, that loan may go with the car. The same is true with a house.

So if you’re planning to leave someone an asset with a 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. If they’re cosigned, the co-signer may be on the hook. If they weren’t co-signed, the estate will be liable. You can read more about student loans after death here.

What you should do while you’re still alive

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, Estate-Planning Documents You Need Right Now.) 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.

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.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
10 Common Expenses That Have Skyrocketed for Seniors

Retirees must stretch their dollars further and further these days — no thanks to these costs.

How to Achieve Your Financial Goals in 2020

New year, new you. Get your finances on track with the help of these tools for investing, saving, budgeting and earning.

10 Colleges That Offer Free Tuition for Seniors

These schools let retirement-age students study, tuition-free, while earning college credit.

The 13 Worst Types of Tickets for Your Car Insurance Rate

Some types of traffic violations can drive your car insurance rate dramatically higher.

Could You Give Up These 7 Expenses to Save Thousands of Dollars a Year?

You could save more than $30,000 by setting aside these costly expenses for just one year.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
10 Things Frugal People Never Buy

If you’re a true tightwad, the mere thought of spending money on these items gives you the willies.

10 Useless Purchases You Need to Stop Making

You might as well flush your money down the loo if you spend it on these things.

7 Social Security Benefits You May Be Overlooking

There’s more to Social Security than retirement benefits.

3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

The 6 Best Investing Apps for Beginners

If you’re looking to ease into investing in the coronavirus economy with just a little money, check out these easy-to-use tools.

14 Things You Should Stop Buying in 2021

These convenient household products come with hidden costs that you might not have considered.

8 Things You Should Replace to Improve Your Life Today

Being frugal isn’t smart if you put off replacing these items.

7 Kirkland Signature Items to Avoid at Costco

Even if it seems you save a bundle buying Costco’s Kirkland Signature brand products, they may not be the bargain they appear to be.

10 Cars You Are Most Likely to Keep for 15 Years

The cars that owners hold onto the longest have one thing in common, a new study shows.

9 Things You Should Never Leave in a Car

Thinking of leaving these possessions in a car? Prepare for unexpected consequences.

7 Income Tax Breaks That Retirees Often Overlook

Did you realize all these tax credits and deductions exist — or that they apply to retirees?

9 Mistakes People Make When Cleaning With Vinegar

Cleaning with vinegar can save you a lot of money, but using it like this can cost you.

13 Amazon Purchases We Are Loving Right Now

These practical products make everyday life a little easier.

10 Things Successful Retirees Do Differently

These habits and characteristics can help put you on the track to success.

Will You Owe Taxes on Last Year’s Stimulus Payments?

It’s the question on everyone’s lips this tax season.

7 Costly Health Problems That Strike After Age 50

As we age, our bodies wear down. Here is how to cut costs associated with some common ailments.

29 Purchases That Can Save You Money Every Day

Sometimes, you’ve got to spend to save.

7 Things I Never Buy at Costco

A bulk buy isn’t always the best buy.

5 Tax Mistakes to Avoid in Retirement

Even great savers can reduce their retirement income by making these mistakes.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.