What happens to your debt when you die?

Are you worried about leaving debt to your loved ones?

You’re not alone.

More than 40% of Americans say they would suffer financial strain within 6 months if the primary wage-earner in their household passed away, according to a 2015 LIMRA report.

When you die, you may have debts such as:

  • Mortgage loans
  • Final expenses
  • Auto loans
  • Credit card debt
  • Student loans

These debts can have a large impact on surviving family members, according to Laura Troyani, founder and chief editor of PlanBeyond.

“One reason early deaths are so devastating to a family is because the deceased is actively paying off things the family uses on a regular basis like a car or a house,” she said. “When they pass away, there may be no way to pay those debts off and debt collectors [may] take the assets away to recoup their losses.”

In addition to those costs, your family could also be responsible for paying for your funeral and burial services, which can cost several thousand dollars.1

A guaranteed acceptance life insurance policy can help pay for some of these expenses.

[Find out how life insurance coverage helps pay for your debts when you’re gone]

Who is responsible for your debt?

So what actually happens to your debt when you pass away?

The short answer: it depends on your debt and where you live. Your loved ones may be held responsible to pay your debts if they co-signed the debt or if you live in a community property state.

“If a debt is owed by an individual at the time of his/her death, it is personal to them,” Elliott Portman, an attorney with Portman Law Group, P.C. said. This means that, in situations where an individual is the sole debtor, family members are not required to pay those debts when he or she passes away.

This is good news, according to Troyani.

“So long as the debt is in your name alone — say credit card debt or a bank loan — the creditors can’t go after family members to recoup the money,” she said.  

When your estate pays the debt

However, in many cases, your estate will have to pay the remaining balance of your debt. Your estate is your net worth, including what you own and what you owe. Troyani said your estate can include both tangible assets (like homes and cars) and intangible assets (like bank and investment accounts).

If your estate goes through probate — a formal legal process that establishes the validity of your will and appoints someone to administer your estate — your estate administrator will review all of your assets and debts to determine which debts should be paid and in what order.

Troyani said that creditors are always first in line for payment.

If your estate does have enough assets to pay all of your debt, the remaining assets usually will be distributed to the heirs you outlined in your will. However, if there are no assets remaining after paying off creditors, your heirs may not receive an inheritance.

If your estate does not have enough assets to pay all of your debt, certain creditors may write off the debt.

“Unless another person co-signed or guaranteed the debt, they are not liable to the creditors of the deceased,” Portman said. This means it simply goes unpaid.

When your loved ones are liable for the debt

There are 4 certain exceptions to the rules outlined above, according to the Federal Trade Commission.

Your loved ones may be responsible for the debt if they:

  1. Co-signed the debt;
  2. Live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin);
  3. Are the deceased person’s spouse and state law requires them to pay the debt; or
  4. Are legally responsible for resolving the estate and they didn’t follow state probate laws.

If you co-signed a debt with a family member or spouse, that family member or spouse will be responsible for the remaining debt after you pass.

Troyani said all bets are off in this situation. For example, if a spouse co-signed a mortgage, the surviving spouse will be expected to continue making the mortgage payments.

“If he or she can’t [make the mortgage payments], they’ll need to sell the home to pay the bank off,” she said.

Another exception outlined by the Federal Trade Commission occurs in community property states. If you live in one of these states, debts that you accumulated during a marriage may be considered joint property with your spouse.

This means your surviving spouse could be held responsible for your remaining debt, such as credit card debt or business loans when you die.

[Get protection to help pay for joint credit card debt]

Other final expenses to consider

Consumer debts are not the only expense that may be transferred to your loved ones. When you die, someone will have to pay for the funeral and burial costs.

The median cost of an adult funeral in the United States is about $7,200, according to the National Funeral Directors Association.

Cremations are expensive as well. The median cost of an adult cremation is about $6,100.

These median costs do not include other costs like floral arrangements and headstones.

“As people get older, they should consider preparing for their funeral expenses,” Portman said.

If you do not prepare ahead of time, your spouse, children, parents, or friends may have to foot the cost.

But there is a way to prepare for these costs ahead of time: life insurance.

Life insurance can help pay your remaining debts

Portman said there are two main ways to pay for your funeral costs:

  1. Prepay for your funeral; or
  2. Get a life insurance policy.

If you cannot afford to prepay upwards of $7,000 for your funeral costs, you should consider buying a life insurance policy.

You may be able to get $7,500 in guaranteed life insurance coverage for about $31 per month, with no medical exam or health questions required to apply.2

“Life insurance is the #1 way that these things get funded,” Portman said.

Troyani agrees.

“[Life insurance] is a great solution for people who don’t want to burden their families with final expenses like funeral costs or want to leave their families a little something when they pass away,” she said.

One type of policy, guaranteed acceptance life insurance, can provide your loved ones with the money they need to help pay for your funeral and burial costs. They can even keep the money or use the money to help pay for other expenses.

A 50-year-old female could get a guaranteed acceptance life insurance policy for around as little as $10 a month. No medical exam or health questions are required to apply.3 They are set up to last for your entire life, and premiums never increase.4

See how life insurance coverage can help protect your loved ones by requesting a free quote or calling 1-877-647-4570.

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1 According to 2014 statistics provided by the National Funeral Directors Association.

2 $30.75/month is the rate for a 50-year old female receiving $7,500 in life insurance coverage from a MassMutual Guaranteed Acceptance Life Insurance policy. Note that this product has a graded death benefit during the first two years.

$10/month is the rate for a 50-year old female receiving $2,000 in life insurance coverage from a MassMutual Guaranteed Acceptance Life Insurance policy. Note that this product has a graded death benefit during the first two years.

4 This policy will remain in effect for as long as you continue paying your premiums.