If you’ve ever wondered what happens to your debt when you die, you may be in for a surprise! Debt doesn’t go away with your death. Once you die, your debt is passed along to your heirs. If you owe creditors money, whether it be medical debt or a car loan, the executor of your will is responsible for using your assets to pay off your debt.
There are two types of debts that you can potentially owe to a credit after your death. Secured and unsecured debt are the two types of debt that your estate is responsible for. Auto loans, mortgages, and other types of bank loans constitute secured loans. These debts can be paid on an installment plan by your estate, paid upfront by your estate directly to the lender, or your estate may sell off your property to paid off the loans. This can be done through means like an estate sale or a property auction, where your home and its contents are sold to the highest bidder.
Credit card debt and bills fall under the unsecured debt umbrella. This debt is typically not paid via auction or estate sale, since they are not entitled to that portion of the estate. Instead, your estate will typically pay all of these bills with the money or assets you leave behind.
Student loans are the only type of debt that disappears with your debt. Your heirs aren’t responsible for paying off your student loans, especially if it was a federal student loan. However, if one of your dependents or family members cosigned on a private student loan for you, they will still be on the hook for your debt even after you die. PLUS loans are technically forgiven under the law, but could leave a parent or another family member with higher taxes after you die.
Be sure to meet with an estate planner prior to your death in order to work out a plan for how you plan to pay off your debt after you die. The best case scenario is that you pay everything off before you die, so your estate is only responsible for funeral costs and other end of life expenses. The more debt you leave your heirs, the less money they receive as part of their inheritance.
Also, your estate planner can help you review your life insurance policy. When beneficiaries to your life insurance policy are assigned correctly, they may be shielded from certain creditors, especially credit card companies and collection services. Your beneficiaries will appreciate this in the long run, because it can keep them out of the courtroom when dealing with your end of life affairs.
