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Debt After Death: Protecting Your Estate and Heirs

When it comes to our inevitable death, chances are, we’re all going to have at least a little bit of debt. Examples include common everyday bills such as rent and utilities, all the way to extraordinary bills like what you might receive after a multi-day hospital stay. For some families, the discovery is much worse. The person could have been hiding a gambling problem — or even an enormous credit card balance. According to Debt.org, “73 percent of Americans are likely to die with debt.”1

As we all know, creditors are entitled to payment of these debts, regardless of someone passing or not. However, some situations are easier to navigate than others. For example, when it comes to mortgages, the person has to pay monthly bills to cover the debt, or else they have to sell the property. Credit card debt and student loans get a bit trickier. If you’re someone who’s concerned about incurring debt after a family member’s death, or who’s worried how their debt will impact their heirs, here are some things you should know.

Estate Planning: An Overview

Regardless of their value, once you pass, your assets become your estate. The dividing up of debt and responsibility after your death is called probate. The length of time creditors have to make a claim against the estate is going to depend on where you live. It can range anywhere from three months to nine months. Therefore, you should get familiar with your state’s estate laws so you’re well aware of which rules apply to you.

Debt After Death: What You Should Know

1. Your money is partially protected.

According to Ed Slott, a consumer advocate and retirement and tax expert, if you or a family member dies, as long as you or your loved one filled out a beneficiary form for each account — such as your life insurance policy and 401(k) — unsecured creditors cannot collect any money.2 However, if beneficiaries were not determined before the death, the funds would then go to the estate, which creditors could go after.2

2. What you’ve signed is important.

Even if you did not contribute to a credit card balance, if you signed a joint application for the card, you are liable to repay that balance if your family member passes. This is not to be confused with being an authorized user, which has different rules. Depending on the state you live in, you may not have to pay that balance. If the estate is broke and the owner of the credit card passes, make sure to avoid using the credit card as it could be viewed as fraud, which makes the situation even more complicated.

3. Marriage matters.

If your spouse passes, you’re legally required to pay any joint tax owed to the state and federal government. In certain states, you must abide by community property laws that make you — the surviving spouse — in charge of paying off any debt your partner acquired while you were married. However, in other states, you may only be responsible for a select amount of debt, such as medical bills.