With debt so ingrained in our lives, people often die with unpaid outstanding balances. Generally, obligations of this nature are paid out of the decedent’s estate, or by a cosigner if one exists.
In extreme situations, in which there are not enough funds to meet the person’s financial responsibilities, debts may go unpaid altogether. However, things can vary according to the exact circumstances.
Here’s a look at what happens to debt after death.
Who Pays?
Unless you’re married to the person and the two of you incurred the debt together, you will likely not be held responsible for it. But if the person who passes leaves an estate, and you live in a state in which there is no requirement to pay survivors first, creditors can go after the estate to receive compensation.
However, this also depends upon the type of debt and whether it is considered secured or unsecured.
It should also be noted that there is a statute of limitations on debt after death in many states. The exact time frame varies from location to location, as well as according to the type of debt.
Secured vs Unsecured Debt
Secured debt is backed by collateral to reduce the risk associated with lending. If the borrower defaults on repayment, the lender can take possession of the item—typically referred to as collateral— and sell it to get the money they’re owed. The difference will be refunded in instances when the item sells for more than the outstanding balance.
There are also cases in which property or other tangible items of value can be pledged as collateral against a loan, regardless of its purpose. Again though, you will lose the collateral if the debt goes unpaid.
Credit card debt, certain kinds of student loans and some types of personal loans are considered unsecured debt. With nothing backing these loans, lenders usually don’t have options to recover the money should the borrower die with no cosigner or a co-applicant. If there are not enough funds to cover all outstanding obligations, the lender is forced to write off the debt.
Potentially Inheritable Debt
Post-mortem debts in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) can be passed on to a spouse, even if they are not co-applicants for the loan. Only one state, Alaska, gives couples the ability to choose whether to consider shared property as community property.
Debts for which you are co-signer, or you are considered a signatory individual in any form, can be passed on to you. These are typically—but not limited to—car loans and home mortgages. Similarly, should you inherit a property upon which a loan exists, including timeshares, you will be responsible for paying it off.
Certain types of medical debt can be passed on to survivors as well.
Some Assets Are Protected
Creditors are not allowed to go after retirement accounts, life insurance benefits or living trusts. Taxable investment accounts are also shielded from creditors in the event of an account holder’s death. In addition, being an authorized user on a credit card does not impose an outstanding balance on you if the cardholder passes away.
Seek Professional Help
With so many variables in play in these types of situations, seeking professional assistance is a good idea. This is particularly true in situations when the deceased doesn’t leave a will. In some cases, especially if you’re an older adult, you can get free assistance—depending on your income level.
