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What Happens to Your Debt When You Die?

Wednesday, May 01, 2019
Most people have debt. We accumulate it in the form of student loans, mortgages, car loans, credit cards, and more. The choice to go into debt is often times a choice to invest in our future. Whether you’ve taken out a student loan to pursue higher education or mortgaged your first home, debt is a part of life. 

Have you ever considered where your debt would go if something were to happen to you? What would happen to the next ten years of mortgage payments and all the credit card debt from Christmas? Understanding and preparing for what will happen to that debt when you’re gone is vital.

Most people die with debt, but that debt is typically not passed to heirs. Instead, your estate – all your assets and liabilities at the time of your death – pays down the debt. Only after your estate pays outstanding debts do your heirs get whatever’s left. The legal process that repays debts and distributes assets to heirs is called probate.
 
                            
Heirs

Before heirs get anything from your estate, debts must be repaid. 

Take for example someone who dies with $3,000 worth of assets but owes $4,000 in debt. The deceased’s Will says that they want for all their assets to go to their son. After probate, the son will not inherit anything. The $3,000 the deceased has will go toward paying off the $4,000 debt. The good news is that the son won’t owe anything; he will not be responsible for the $1,000 difference between the value of the deceased’s estate ($3,000) and what the deceased owes ($4,000). Generally, heirs are not responsible for outstanding debt. 

The exception to this is when you give something like a house or car to an heir. For example, if you give your home to your daughter, but the home hasn’t been paid off, your daughter can choose to either accept the home and associated debt, or she can choose not to accept the home and debt. In other words, if she wants to keep the home, she must accept the mortgage that comes with it and pay that off. 

If you are worried about not being able to leave anything to your loved ones when you die, consider purchasing a life insurance policy and naming your heirs as the policy beneficiaries. Alternatively, consider putting your assets in a retirement account and naming your heirs as beneficiaries. Both life insurance policies and retirement accounts are not required to be used to pay creditors. 


Community Property – Considerations for Your Spouse 

Louisiana is one of a handful of states that has what is called community property. Under community property laws, everything earned and purchased during a marriage is co-owned by both spouses. If you should die before your spouse, your spouse will be responsible for the debt you accumulated during your marriage – even those debts that are only in your name. (Your spouse generally is not responsible for debt you accumulated before your marriage.)

For example, if you die after ten years of marriage, the credit card debt you accumulated during those ten years will be the responsibility of your surviving spouse because that credit card was used for the household. Additionally, if your spouse wants to keep your home that has been mortgaged, they will have to continue making mortgage payments. 





Each state has its own laws governing what happens debt in probate. Consult with an attorney in your state to be sure your estate plan accounts for what will happen to your debt when you die.

This article is based on “What Happens to Debt in a Succession” by the Trapolin Law Firm (July 10,2018) and 
“Dying with Debt” by the National Care Planning Council (February 26,2019).