Planning Your Legacy

What Happens to Your Debt When You Die

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If you owe money to creditors, you may be worried about how your debt will affect your loved ones when you die. During the probate period (the period during which the legal system determines how your assets should be distributed), creditors have approximately four months to file claims against your estate.

Generally, your estate is responsible for any debt you leave behind, and your debts will be paid during the probate period using the following guidelines:

  • If your estate has adequate cash, it will be used to pay off your debt.
  • If your estate doesn't have the cash but has enough assets to cover the debts, your assets will be sold during the probate period to pay your debts.
  • If your estate doesn't have adequate assets to cover the debt, your estate will pay off the debt in the order determined by state law. Then creditors must generally write off the remaining unpaid debts.

Non-probate assets

Assets such as retirement accounts and life insurance policies go directly to the named beneficiaries instead of through probate. Therefore, these assets aren't considered part of the estate and generally won't be used to pay off debts. Consult an attorney to clarify the rules in your state.

Your mortgage

Federal law allows your surviving spouse to take over the mortgage on your home (if he or she qualifies for it financially) without having to immediately pay the balance.

Your home equity loan

If a home equity loan is in your name alone, the executor will try to pay it off during probate, which could mean selling the house.

If you and your spouse have a joint home equity loan, your surviving spouse will likely need to refinance and prove he or she can handle the payments. If your spouse isn't able to make the payments and doesn't have cash to pay off the loan, he or she may need to sell the house or go through foreclosure. Consult an attorney to clarify the rules in your state.

Credit cards and other loans

If you have credit card debt or other loans such as auto loans when you die:

  • If the debt is in your name only, the remaining balances will be paid during the probate process.
  • If your spouse or anyone else cosigned any of the debt, he or she will be responsible for it.
  • Authorized users (who didn't cosign on the debt) aren't responsible for paying the debt.

Community property laws

The exception to many of these situations occurs if you live in one of the ten or so states with community property laws. In that case, any assets and debts acquired by one spouse during the marriage automatically belong to both spouses.

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