Death is certainly not an enjoyable topic to discuss, but since our financial issues do not get sorted out by themselves when we die, we have to make sure that our loved ones will know what to do in order to pay the debt and not have to deal with any unpleasant surprises.
Even though life is unpredictable, it doesn't stop so that we can figure things out. And so, in this article, we've compiled the most important things you need to know about who has to pay the debt after you die.
How are debts going to be paid after your death?
Generally, when someone dies, the outstanding debts are going to be paid with the accumulated assets or through their estate. The executor of an estate, who is the person that is legally responsible for it after someone dies, needs to make sure that the debts will be paid.
These are all the debts that need to be paid after you die: Mortgages, home equity lines of credit, credit card debt, car loans, private student loans (federal student loans are discharged at death).
If you have a mortgage and you pass away, you need to be aware of these scenarios:
- If you have enough money in your estate, it can pay off the mortgage so that your heirs can keep the house. Don't forget to make this clear in your will, so that there won't be any misunderstandings.
- You can name a relative in your will who will take ownership of the house, which means that they will take on the mortgage as well and pay the debt.
- If your heirs can't afford to pay off the mortgage and neither will your estate, the only option is for them to try to sell the house or simply walk away if the selling price is lower than the mortgage.
What if you are broke when you die? Who will pay the debt then?
Most of the time, if you don't have enough money in the estate or in assets, your debts are going to be erased. For example, in the case of a loan, creditors will absorb the debt.
Nevertheless, your family members need to be cautious because some creditors might be pretty persistent. In cases like this, it's important they know their rights and consult a specialist if they're uncertain about their situation.
When surviving family members are eligible to pay your debt
There are a couple of cases in which your family will be responsible for paying your debts after you pass away.
The first case is the one where any member of your family has cosigned on a credit card, loan or mortgage. After your death, they will be the ones who will have to pay any debt associated with what they've cosigned on.
The other case is regulated by state-by-state laws. This means that in some states, which are known as “community property states", a property that is owned by a spouse is consequently owned by the other as well. This rule applies in case one of them dies as well.
Sort out your finances ahead of time
Before you go ahead and make any decisions, it's best to first discuss all your options with a financial adviser. No stone should be left unturned when it comes to the financial security and stability of your family.
If you need advice from a financial professional, contact one of our financial advisors. Find one in your area who can meet your needs, and get in touch with them as soon as possible.