What Happens To Your Debts When You Pass Away?

Our debts stay with us until we pay them off. But what happens if you pass away before you’ve had a chance to pay off your debts? Are they written off, or are your loved ones expected to pay the remaining debt?

This post explains what happens to debts after death. Consult with an attorney before making any decisions regarding these issues. These laws may differ, depending on your state of residence.

Do my debts disappear when I pass away?

Sadly, your debts may not immediately get written off when you die. Your estate (any money or assets that belonged to you when you died) is used to pay off your debts.

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If you don’t have an estate when you die (no money or assets), only then will your debts be written off when you die. If your estate is worth less than your debts, your estate will be used to pay off as much of the debts as possible and any remaining debt will be written off.

It’s worth noting that even if you plan to leave money and assets to loved ones in your will, any debts must be paid out of your estate first. If you have large debts, all your money may be used to pay these debts off, and your loved ones may not receive anything.

Will my loved ones have to pay off my debts?

Your loved ones shouldn’t have to pay for any of your debts out of their own pocket. There are however exceptions where your loved ones may have to pay out:

• Joint debt: If you and a partner took out a loan together, your partner may still be expected to pay off the loan. For example, if you both took out a mortgage together, your loved one would be expected to pay off the mortgage because it’s also in his or her name.
• Guarantors: If you took out a loan and someone signed their name as a guarantor, they may still be legally expected to pay off the loan when you die. For example, if you took out a car loan and someone else had to sign their name as a guarantor, they might have to pay off the remaining debt after your death.

If none of these exceptions apply, your loved ones may not be liable for any debts.

What can I do about my debts before I pass away?

Worried that your loved ones won’t receive any money due to your debts? Or worried about loved ones having to pay off joint debts or debts for which they are a guarantor? There are measures that you may be able to take now to protect your loved ones. Below are just some of the measures you can take.

Get help with estate planning

Estate planning involves taking measures in order to control where your money and assets go when you pass way. On top of writing a will and appointing an executor, you may be able to start making legal changes to ownership of your assets while you are alive.

For instance, if you want to start leaving money behind to a loved one and don’t want this money to be put towards paying off debts, you may be able to start contributing it into a trust fund.

Take out life insurance

The proceeds of a life insurance policy are typically not counted as part of your estate. In most cases, the proceeds will go directly to your loved ones. This means that if all of your estate is used to pay off your debts, your loved ones will still receive some money after you pass away.

There are other forms of insurance that you can look into, such as mortgage life insurance, which can help to pay off a mortgage. These could be worth looking into if you have a large mortgage in place.

Start paying off your debts

Alternatively, you can start taking measures to pay off your debts now while you are able. This could allow you to save up money to leave behind to loved ones without worrying that it will put towards your debts. If loved ones have signed as guarantor or you have joint debts, you also don’t have to worry about them having to pay off the debts after you die.

There are lots of different strategies for debt relief. When it comes to high interest debts, it could be a case of refinancing your debts or consolidating them. You should avoid extreme measures like bankruptcy as this will similarly use money and assets from your estate.

Again, review these issues with an attorney before making any decisions.

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Good luck!

Ken Boyd

Author: Cost Accounting for Dummies, Accounting All-In-One for Dummies, The CPA Exam for Dummies and 1,001 Accounting Questions for Dummies

(email) ken@stltest.net