What Happens to Debt When You Die?

What happens to debt when you die? If you have a mortgage, credit cards, auto loans or other types of debt, you might have concerns about leaving these bills to your family members.

According to the Consumer Financial Protection Bureau, your estate must pay outstanding debts before the executor of your estate distributes any remaining assets to the heirs you have named in your will. However, your family members won't become personally responsible for your debts.

Who Has to Pay Someone's Debts When They Die?

If you leave behind a spouse when you die, they may have to pay certain debts depending on your state of residence. Surviving spouses who live in Wisconsin, Arizona, Washington, California, Texas, Idaho, Tennessee, Louisiana, South Dakota, New Mexico or Nevada must repay marital debt with community assets, such as shared bank accounts or retirement funds inherited from the deceased spouse. 

When you and your spouse share a bank account or credit card, they will remain responsible for debts associated with joint accounts if you die. This rule also applies to loans you and your spouse signed together, which can include mortgages, auto loans, student loans and other types of debt.

When you prepare a will, you name an executor to manage your estate. If the court finds that person mismanages the estate and as a result it cannot pay back your debts, the executor becomes personally responsible for any outstanding amount.

What Types of Debt Does the Estate Have to Pay?

Only some types of debt pass to your estate or possibly your surviving spouse. While rules vary by state, these are some of the general guidelines:

• Medical debt usually takes first priority when the executor begins repaying debt from estate funds. In fact, if you die after age 55 and received Medicaid, the state may place a lien on your home to repay your health insurance premiums. If you have substantial medical debt, a detailed estate plan can provide a clear path forward.
  
  
• Private student loans come after medical debt in terms of repayment order. Your spouse will become responsible for these loans only if they cosigned your application or you live in a community property state and took out certain types of loans while you were married. Most federal student loans provide debt forgiveness when the borrower dies.
  
  
• Credit card bills fall below medical debt and private student loans in order of priority. Your estate will repay these bills only if money remains to do so after paying other types of debt. If you have a joint card with a spouse or someone else, that person remains responsible for the balance.
  
  
• Auto loans are secured by the vehicle. In some cases, a family member might refinance the loan and purchase the car. The estate can also pay off the loan and the car can go to one of heirs. Otherwise, the lender can repossess the vehicle and resell it to clear the debt.
  
  
• Mortgages are repaid by the estate after the homeowner dies. You can leave your home to someone in your will, but that person will have to either take over payments or sell the house to pay the mortgage balance if your estate doesn't have the funds to settle the loan. If you own the home with a spouse or someone else, they will retain the property and remain responsible for the mortgage after you die.

Can Creditors Seize Assets to Repay Debts?

Creditors can seize certain types of property to pay debts after you die. They may take and sell antiques, jewelry, stocks and other investments and real estate. However, they cannot take retirement investment accounts, life insurance benefits or assets held in an irrevocable or living trust. You can move assets into the ownership of a trust during your lifetime to prevent them from being seized by creditors.

It's also important to protect your family by making a detailed estate plan and purchasing life insurance if you have debt. Otherwise, your creditors could take their home, vehicles and other valuable assets. Your beneficiaries can use the proceeds of a life insurance policy for any purpose. For example, they can pay off the mortgage so they can continue living in the family home without worry.