Understanding Debt After Death: What You Need to Know

Dealing with the death of a loved one is challenging enough without the added stress of managing their financial obligations. Whether it’s a mortgage, car loan, or credit card bill, many people pass away still owing debts. But what happens to these debts when someone dies? This comprehensive guide will help you understand how different debts are handled after death, who is responsible for them, and which assets are protected from creditors.

How Debt Is Handled After Death

Your estate encompasses everything you own, including savings, your home, investments, and more. When you die, your estate is distributed through a legal process called probate. If you have a will, a probate court will confirm its legitimacy and ensure that the executor named in your will distributes your property and pays any taxes you owe. If you die without a will, a probate court will decide how to split up your estate, appointing an administrator to oversee the process.

Who Is Responsible for Your Debt When You Die?

When you die, any outstanding debts are classified as either secured or unsecured:

• Secured debt: Backed by collateral, such as mortgages and auto loans. If the debt isn’t paid, the lender can take the collateral to satisfy the loan balance.
• Unsecured debt: Not backed by collateral, such as credit cards, student loans, and some personal loans.

Both secured and unsecured debts are paid out of your estate. If your estate can’t pay off a secured debt, the property used as collateral might be sold, refinanced, or given to the lender to pay off the loan. For unsecured debt, the money and other assets in your estate will be used to pay off the debt. If your estate doesn’t have enough money to pay your debts, state laws determine which creditors get paid, with secured debts generally taking precedence.

Authorized users on your credit cards aren’t responsible for paying any outstanding balances after you die.

Which Debt Can Be Inherited?

Certain debts can be inherited after you die, while others cannot. Inherited debts may include:

• Joint debts: If you took out a loan with someone else, they’re responsible for repaying it after you die. Mortgages and car loans are common types of joint debt.
• Cosigned debt: When someone cosigns a loan or credit account, they agree to pay the debt if you don’t. If you die and your estate can’t repay the debt, your cosigner becomes responsible.
• Home equity loan on an inherited house: Whoever inherits your house also inherits any outstanding home equity loan.
• Debt in community property states: In states like Arizona, California, and Texas, your spouse may be responsible for certain debts after you die, even if you’re the sole borrower.
• Timeshares: Timeshare owners sometimes add their heirs to the timeshare deed, making them responsible for annual maintenance fees.
• Medical debt: Laws in some states hold spouses or children legally responsible for certain types of medical debt.

Which Assets Are Protected From Creditors?

Some assets are protected from creditors, including:

• Retirement accounts such as 401(k) or 403(b) plans, Solo 401(k)s, SEP IRAs, Simple IRAs, Roth IRAs, and health savings accounts.
• Life insurance payments, which go to your beneficiaries and don’t have to be used to pay your debts.
• Living trusts, which allow you to pass on property to your heirs and avoid probate. Assets held in a living trust are protected from creditors.
• Brokerage accounts, which are taxable investment accounts held with an investment firm or brokerage, can’t be taken by creditors.

How to Notify Creditors of Death

Your loved ones or the executor of your will should notify creditors of your death as soon as possible. To do so, they’ll need to send each creditor a copy of your death certificate. Creditors generally pause efforts to collect on unpaid debts while your estate is being settled. They will also alert the three consumer credit bureaus (Experian, TransUnion, and Equifax) of your death, marking the specific account as associated with a deceased person.

Your spouse or executor can also contact Experian, TransUnion, and Equifax directly to inform them of your death and submit copies of the death certificate. It’s also a good idea for the people in charge of your estate to get a copy of your credit report, which lists all your creditors in one place. This can be useful in the probate process and for helping your loved ones notify them of your death.

The Bottom Line

Your loved ones may assume they’re responsible for any debts you owe when you die. However, that isn’t usually the case. Most debts will be paid out of your estate, and some may go unpaid. Before making any payments, family members should consult an attorney to clarify which debts they do and do not have to pay.

At O1ne Mortgage, we understand that dealing with financial matters after the death of a loved one can be overwhelming. If you have any questions or need assistance with mortgage services, please don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you navigate these challenging times with compassion and expertise.