No one wants to think about money when a loved one passes away; it seems like such a superficial and unimportant topic when your world has been shaken. Still, the fact is that deaths occur every day. You need to understand your role in handling a loved one’s debts when they pass.
What Happens to Debts When a Loved One Dies?
In general, when someone dies, both their assets and their debts become the property of their estate. It is then the executor of the estate’s job to use their assets to pay off their debts. This process of paying and divvying up a person’s debts after their passing is called probate.
There are special instances in which certain debts may be inherited by specific people, but in general, it all goes toward the collective estate.
The Estate vs. Beneficiaries
There are some types of accounts that allow a person to name a specific beneficiary after they die. For example, this includes 401k accounts and life insurance.
If the person names an individual as the beneficiary of an account like this before they die, that money goes directly to the beneficiary and cannot be used to pay the person’s debts. If the person doesn’t name a beneficiary for these accounts, though, they go to the estate and can then be used to pay off debts.
While most debts belong to your loved one’s estate, there are certain circumstances in which another person will directly “inherit” the debt. The most common cases of this are joint accounts that were held by the person who has died and someone else.
For example, if your loved one had a joint credit card with someone, that person has full responsibility for that card’s balance when your loved one dies. The same is true if your loved one held a loan and someone co-signed on that loan; it becomes the responsibility of the co-signer.
In community property states, if a person dies, their spouse is directly responsible for any debts that the person had acquired during the marriage. In some cases, a person who doesn’t comply with the laws of the probate process may also inherit some debts.
The Rarity: Debts Forgiven Upon Death
Are any debts simply forgiven when the debt-holder dies? Yes, there are some, but they are rare. Most commonly, federal student loans are forgivable if the borrower dies. Some of these loans issued to students’ parents are forgiven when either the student or the parent dies.
It’s important to note that private student lenders aren’t legally required to forgive debts when the borrower or student dies. Some will, but it isn’t a safe assumption to make.
What Happens with the Mortgage?
Here’s a common circumstance that worries some people. Your loved one has stated in their will that they want their home to go to you. However, when they die, they still owe money on the mortgage for the house. Because most debts are due in full when the debt-holder dies, does that mean you’ll need to either come up with the cash or sell the home to pay off the mortgage?
Thankfully, no. Since 1982, there is a federal law in the US stating that mortgage lenders must allow the person who inherited the home to take over the mortgage if they choose. This way, you do need to continue paying the mortgage payments, but you can keep the home in the process.
What if the Estate’s Assets Don’t Cover the Debt?
There is a common fear that if a person dies and they have more debts than they have assets to pay those debts, the debts become the responsibility of their children or other next of kin. Fortunately, this is not the case.
As we noted above, when a person dies, their assets and debts all belong to their estate, and the executor must use their assets to pay their debts. If the debts outweigh the assets, though, the debts simply go unpaid.
The primary exception is if the debt was in someone else’s name along with the deceased person’s name, such as a joint credit card or a co-signed loan. Otherwise, you will not be left personally responsible for the debts of your loved ones when they die.
It’s important to note that debt collectors might still call to try to solicit money from the estate. There are limiting laws they must follow, though. For example, they can only contact certain people like the executor, the person’s spouse, and so on.
They can’t lie to you in an effort to collect the debt either, such as by telling you you’re personally liable when you aren’t. Knowing these rights will help you ensure that you don’t fall prey to a sneaky debt collector who doesn’t want to abide by the probate laws.
Understanding the Finances of a Loved One’s Passing
Thinking about our loved ones passing away isn’t how anyone wants to spend their time. Still, you can save yourself a lot of work and worry if you understand how the process works in advance. Along with this guide, explore our other financial resources to give yourself the benefit of knowledge.