By Aubrey Cohen
Your debts become the responsibility of your estate.
When you die, any debts you leave behind could eat up assets that you had hoped to leave to heirs. In some cases, family members could even be on the hook for your debt. Many people buy life insurance not only to leave something behind for their loved ones but also to help deal with any debt and final expenses.
Will your debts die with you?
After you die, your debts become the responsibility of your estate — which is everything you owned at the time of your death. The process of paying your bills and distributing what’s left is called probate.
Your executor (the person responsible for dealing with your will and estate after your death) will use your assets to pay off your debts. This could mean writing checks from a bank account or selling off property to get the money. If there isn’t enough to cover your debts, creditors generally are out of luck.
But specific kinds of debts have their own wrinkles.
Mortgages and home-equity loans
If a property has a mortgage, the lender has some protection, at least up to the value of the property.
But federal law bars lenders from forcing a joint owner to pay off the mortgage immediately after the death of another co-owner. This also applies to any relative who inherits the home and lives in it. Practically, this means the family member or co-owner can simply take over the mortgage payments.
An outstanding home-equity loan against the property is different. A lender can force someone who inherits a home to repay the loan immediately, which could require selling the house. That said, lenders might work with new owners to allow them to simply take over the payments on the home-equity loan as well.
In the case of an auto that is not fully paid off, the lender has the right to repossess the car. But typically whoever inherits the vehicle can simply continue making payments, and the lender is unlikely to take action.
Once the estate runs out of assets, credit card companies are out of luck, because this debt is not secured by assets the way mortgages and car loans are. Any joint account holder would be responsible for the bill, but people who are simply authorized users of a card would not.
In community property states, listed below, spouses are responsible for any debts incurred during the marriage, including credit card debt.
Lenders have no recourse if the estate does not have assets to repay other unsecured obligations, such as student loans.
If your relatives are not responsible for your debts, collection agencies may still legally call to discuss debts and to try to find someone authorized to pay them, according to the Federal Trade Commission. But collectors cannot mislead family members into thinking they’re responsible for the debts.
There are circumstances in which spouses or other people would be personally responsible for your debts. These include if they:
- Co-signed for a loan.
- Are joint account holders.
- Are spouses in community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Spouses are not responsible for debts that predate the marriage, although half of any community property from a marriage could be put toward such obligations.
About 30 states have “filial responsibility” laws that could make adult children responsible for debts related to caring for parents or parents responsible for debts related to care of their children. These laws once were rarely enforced, but there have been recent cases in which creditors have used the statutes to pursue family members.
Creditors typically cannot go after your retirement accounts or life insurance proceeds. Those will go to the named beneficiaries and are not part of the probate process. But if the life insurance beneficiaries you named are no longer living, your death benefit may go into your estate and can be subject to creditors. That’s one reason why it’s important to make sure your policy names the proper beneficiaries.
Life insurance can help with debt payments
To decide whether you need life insurance to cover debts after your death, consider these questions:
- Do you have family members who would be responsible for your debts?
- Do you have debts that would eat up assets you want to pass on to family members?
- Do you want to pass on money that couldn’t be diverted to pay your debts, even if you owe those debts?
Life insurance can help in any of these scenarios. Term life insurance policies, which provide a death benefit for a set number of years, are suitable for most people’s life insurance needs. NerdWallet’s life insurance tool is a good place to compare prices. If you want to consider a permanent policy, such as whole life insurance, consult a financial advisor.
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