What Happens To Your Debt When You Die?
Debt after death can be tricky. Sometimes debt is forgiven; other times, collectors will hound your loved ones to recoup old debts. In most cases, your estate — not your survivors — will be responsible for paying debts you leave behind after dying. That means any money you had left in accounts will be used to pay debts first, and then distributed to your survivors per your will.
However, there are many exceptions, especially when it comes to cosigners, and state laws that impact who is on the hook for paying debts. It’s a good idea to plan ahead and consult an attorney to ensure your estate and assets are handled correctly. Otherwise, there’s an existing order of operations to who gets your money.
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Debt After Death: Who Is Responsible?
The short answer is easy: only account holders, cosigners, or spouses in community property states can be held accountable for your debts, for the most part. There are exceptions and different state laws, of course, but in general, if their name is not on the account — not including authorized users — or they are a spouse in a community property state, they are not liable.
It’s also important to note that you can leave assets, but not debts, in your will. Your assets will also be used to pay any debt you have at death. Secured debts are paid first, then unsecured, and then whatever is left is assigned per your will as much as possible. There are exceptions to this, as well. Life insurance and retirement accounts, for example, will go straight to the beneficiary, and cannot be used to pay debts during probate.
Secured Debt After Death
HELOCs, mortgages, and car loans are all examples of secured debt. Essentially, it’s debt with collateral. HELOCs and mortgages mean the lender can take the house as collateral; car loan lenders take the car. Because there is physical collateral, they get the highest priority when it comes to paying debt out of an estate, and usually with the actual collateral.
Unsecured Debt After Death
Student loans, credit card debt, and personal loans are examples of unsecured debt. They don’t have specific collateral, so they are lower priority when it comes to probate. If, for example, paying out mortgage and auto debts wipes out the money money left in the estate, and there is none left for credit card debt, the creditors will simply have to eat the cost. Unless, of course, a survivor is also liable, as mentioned above.
Bills After Death: Who Is Responsible?
If bills, such as a phone contract or utility bills, are not cancelled, they may become recurring. They are still liable to be paid by the estate. They often come in the form of informal bills to the executor of an estate, as bills to the deceased. It is especially important that, if the survivors intend on living in the home, they need to change the account to their name and continue paying.
Medical Bills After Death
Medical bills are a bit different. If you were on Medicaid, the state can recover any payments made after you turned 55. Because a house is typically the only worthwhile asset someone can keep and still be on Medicaid, it could turn into a lien on the home.
Depending on the state, Medicaid bills may be negotiated for less than full cost with the executor. They will not, however, ask survivors to pay with their own funds.
Otherwise, in general, medical bills will need to be paid from the estate, assuming there is money in the estate. However, more than half of states have “filial responsibility” laws that allow unpaid medical debts, such as those incurred by hospitals or nursing homes, to be paid by the deceased’s adult children.
Protected Assets and Accounts That Creditors Can’t Touch
As mentioned, there are some assets that creditors are not allowed to try and recoup debts from. These include retirement accounts, life insurance benefits, and certain other assets and accounts. These aren’t subject to liens, the probate process, and the settlement of your estate’s debts. However, if the beneficiary of a life insurance policy is also deceased, your money will go to your estate and thus be available to pay off debts.
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A former newspaper journalist, Cole spends his free time reading, writing, playing video games, watching movies, and learning about every subject under the sun. He lives with his wife and daughter in Idaho. Follow Cole on Twitter: @ColeMayer42
This post was updated November 13, 2018. It was originally published October 23, 2018.