What Happens to Debts After Death?

No one hopes to carry significant debts into retirement, and you particularly don’t wish to leave behind large debts for your loved ones after you pass away. But some amount of debt is normal for everyone, and is usually unavoidable. Planning for those debts, then, is the way to protect your heirs from excessive worry or burden.

Understanding the two primary types of debt is key to planning for your future. Secured debts are those which are backed by an asset, such as a mortgage on a house or a loan on a car. If you leave behind secured debts someday, your heirs will be tasked with either making those payments, or selling the asset to pay off the loan. Otherwise, the assets can be seized by repossession or foreclosure.

Unsecured debts are those that are not backed by an asset, such as student loans, credit cards, and personal loans. Each of these are handled a bit differently, according to the type of debt as well as state laws, so we can only provide general information here.

Cosigned debts usually aren’t written off. If one party cosigns a loan for another, or adds an “authorized user” to a credit card account, that person is liable for remaining balances in the event of a death. It won’t matter if the two of you had a different arrangement regarding who makes the payments. Student loans are particularly tricky, because most lenders will not waive those debts.

Your spouse is still responsible for your medical bills. In most cases, final medical bills are assumed to be your surviving spouse’s responsibility.

Some assets are protected. Creditors generally cannot seize assets such as life insurance payouts, jointly held property, and pay-on-death bank accounts or retirement plans with named beneficiaries. It’s very important that you pay close attention to each beneficiary form, and fill it out correctly, so that the intended heir will receive that asset. Otherwise the assets become payable to the estate, and then creditors can claim the funds to cover outstanding debts.

These are just some general rules, but financial planning for end-of-life issues can be tricky. It’s important to consider these facts when selecting a life insurance policy or making other decisions. Work closely with us as you plan for your future, and we can help you anticipate these issues and create a strategy to protect your surviving spouse or heirs.