What Happens to My Debts When I Die?

When planning a future for your loved ones, you do not want your legacy to include a mountain of debt. Many people are unaware that their debts can continue to haunt those they leave behind. Whoever you select to manage your estate will serve as the “executor,” and that person is responsible for probate, the process of paying your bills and debt after death.

What Happens to My Debts When I Die? - Lee Legal - DC VA MD

Each man’s life
touches so many other lives.
When he isn’t around,
he leaves an awful hole, doesn’t he?

It’s A Wonderful Life

What Happens to My Debts When I Die?

Here are some common types of debt and how each can affect your loved ones:

Mortgages. If a home is jointly owned or inherited by a loved one, they are responsible to continue paying the mortgage. Federal law prohibits lenders from requiring that the mortgage be paid off immediately in the event of death. If there is money in your remaining estate, it can be used to take over these payments until a decision is made about whether to keep or sell your home.

Auto loans. If your car payments stop, the lender can repossess the vehicle. However, whoever inherits the car can continue to making payments if they choose to keep it. Remember to officially transfer title of the vehicle, also, to avoid any potential penalties.

Student loans. Federal student loans are forgiven upon death. Private school loans, however, can take money from your estate. But if there are no remaining funds, private loans will also be forgiven. In the event of a co-signer or if you received the loans while married, he/she will be responsible for the remaining debt.

Credit cards and medical bills. These types of debts are considered “unsecured.” So if your estate runs out of money after paying mortgage and car loans these creditors will not get their money back. But if you have a credit card with a joint account, that person remains on the hook to pay off the debt. This general rule does not apply to authorized users, but it is advised for them to no longer use that card.

Taxes. If a deceased spouse owes back taxes and the couple filed jointly, both spouses are liable for the entire amount of the taxes. The IRS may attempt to collect back taxes from the deceased spouse’s estate, however, even if the couple files separately. The IRS allows for an exemption from spousal tax liability called Innocent Spouse Relief. This exemption can provide relief if your spouse failed to report income, reported income improperly, or claimed improper deductions or credits.

How can you avoid leaving a legacy of debt?

Get help now. Seek counsel from a bankruptcy lawyer or financial adviser to discuss your debt. Eliminating your debt through bankruptcy before you die may be the right option for you.

Prepare your estate so there are no surprises. Establish your will with an attorney in advance to avoid leaving loved ones in a lurch.

Alert your loved ones to the status of your debt. Debt collectors are permitted to contact your heirs to collect on debts. However the Fair Debt Collection Practices Act prohibits creditors from misleading your family about what they’re responsible for paying. Be sure to discuss what is and is not part of your debt with a trusted family member or friend.

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