What happens to your debt when you die

When a loved one passes away, the financial situation they leave behind can add confusion and challenge to a season of grief. Imagine discovering that there are multiple loans or other obligations outstanding, with creditors who need to be notified and want to settle up. The whole experience can leave family members wondering: What happens to your debt when you die? It's worth exploring how debt is handled after a person dies, both for any loved ones in this situation and for your own estate planning.

Your estate refers to everything you own and owe at the time of your death—so technically, everyone has an estate. However, there are indeed people who pass away with no assets and no will, yet they still have obligations and loans. Even small or insolvent estates must go through a legal process—often a simplified probate procedure—ensuring debts are addressed and any remaining assets are distributed according to state laws.

When there are no estate planning documents like a will, state law governs how a probate court handles the accounts. State laws will be followed, perhaps through appointing an administrator or executor to finalize accounts and distribute any assets to heirs. If there are no assets at all, creditors will follow your state's laws on collecting debts.

If there's a lack of clarity about the person's estate or if the probate process isn't followed correctly, loved ones could receive inquiries from debt collectors. If this happens, it's valuable to speak with an attorney about your rights and specific state laws that protect your personal assets and restrict how debt collectors can contact and make requests from you.

People sometimes wonder if debt dies with you. The reality is that debts don't just disappear. The money and property a person leaves behind generally go toward paying their debts. Relatives aren't responsible for the debts unless they are a co-signer, joint account holder or otherwise share legal responsibility for payment.

Creditors have the legal right to file claims against the decedent’s estate during probate, seeking repayment from estate assets before any distributions are made to heirs. This will reduce the amount available to heirs, but it doesn't extend to the heirs' own personal assets beyond the estate. If no assets are available and no co-signers or other obligated parties are connected to the debt, the debt can go unpaid.

Generally, a surviving family member would be responsible for debt only if it's structured so both they and the deceased hold joint responsibility for the debt.

Becoming directly responsible for someone else's debt after they die is possible, but in many cases, the debt will not pass beyond the deceased person's estate. So, you don't actually inherit debt, but you are responsible for debts that were held jointly.

The following are some examples of ways you might be liable for paying a debt after someone dies. (Be aware that these situations are handled differently in different states.)

• If you cosigned on a loan for the person who died.
• If you're a joint account holder (not an authorized user) on a credit card with the person who died.
• If you're a surviving spouse, certain state laws in community property states may obligate you to pay debts out of your jointly held property.
• If you're the executor or administrator of the estate itself, you might need to make certain debt payments out of the estate's assets.

While debt is not technically inherited, legal responsibility may transfer through co-signed agreements, joint accounts or community property laws in certain states. In each context, the debts still can be collected due to pre-existing legal responsibility for the debt. If any of these situations apply to you, it's important to consult a lawyer or accountant to understand your own liability.

Estate planning, demystified

No one wants to leave a confusing tangle of financial accounts when they die. Choosing to prioritize estate planning allows you to give clarity to your heirs ahead of time.

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When a person has debt at the time of their death, the type of debt contributes to how it's handled. Factors like state law and assets in your estate will determine whether that debt is immediately collected from the state during probate or if something else happens. Whether the debt is held with a co-signer or other responsible party also matters.

If you are a joint owner or have a co-signer for debt when you die, that debt usually remains in force for the surviving co-signer. There are specific clauses in some co-signing or joint debt agreements that state what will happen when the borrower dies. It's worth looking into whether you could be released from the loan when the borrower dies based on the contractual terms of your loan.

Some kinds of debt will be handled differently upon the death of the owner of the debt. For instance, secured debts are typically tied to collateral, such as a car or home. In these cases, the debt may be part of the probate process. However, if liquid funds aren't available to settle the secured debt, creditors may have the right to repossess the car, the home or other collateral.

Secured debt can become complex in cases where heirs want to retain the collateral, such as a home equity loan that uses a home as collateral. One path to avoid repossession in this case is for the person inheriting the home to keep up payments on the home equity loan. Taking on this debt could avoid having the home repossessed. It also could give them the freedom to sell at a more opportune time than during the probate process. Estate lawyers can help you work through your options if you inherit an estate with secured debt and collateral assets involved.

For unsecured debt, which isn't tied to any asset, creditors have the right to seek payment from the estate or from co-signers. They cannot legally imply that heirs of the estate are personally responsible for those loans. This could include credit card debt, medical bills or student loans. It also can cover any outstanding utility bills for things like phone, internet and cable.

The legally required order of debt payment during probate varies from state to state. There are also exceptions to various rules when it comes to probate laws. The state where the estate is sent to probate court will determine who gets paid first, second and so on.

Consulting an attorney and an accountant can help you sort out who will be paid and what assets may be inherited. Estate attorneys also are helpful for creating a plan to make a clear, state-specific plan for your own future debt resolution.

Debt is a frequent and common part of life. It's better to have a plan for managing debt than to assume debts will be paid off before you die. Here are some great ways to protect your loved ones and make the estate management season of their lives easier.

• Keep updated records of your debts: Keeping clear records of your outstanding debts will help your loved ones understand your financial situation. These documents are also helpful to you as you work toward sustainable repayment plans yourself.
• Avoid co-signing when it's not necessary: When you can, disentangle yourself from jointly held debt or co-signing, unless it's crucial. Try to only co-sign on loans and other debt that you feel confident you could pay down if it suddenly became your responsibility.
• Consider life insurance if you have major debt obligations: Life insurance offers the opportunity to pay monthly premiums to receive a set payout upon your passing. This can be an affordable way to reduce the financial risk of needing to pay creditors after death. Life insurance payouts can, for instance, help your heirs avoid things like having your home or car repossessed when the estate cannot pay secured debts.
• Create an environment where you can have open family discussions: Many probate processes are complex because no one spoke clearly with the deceased about their finances. Open those conversations up in a supportive, loving and judgment-free way. You can care for each other and create a simpler process for resolving future estates during seasons of grief.

Estate planning proactively protects your loved ones from conflict, confusion and financial risk. Your executor will feel more confident when you've considered ahead of time and made a plan. This continues your legacy of care for your heirs, no matter the size of your estate. A Thrivent financial advisor can work with you and an estate planning attorney to build a financial strategy that supports you now and your loved ones down the road.