What Happens to Debt after Death?

LNWM Client Advisor Bridget Burgess answered this question for Q13 this morning.
Watch the video clip, and then read Bridget’s blog post on this topic.

“Americans Are Dying With an Average of $62k of Debt,” was the headline recently at credit.com. While this may sound alarming, it is not uncommon for people to owe money when they pass away. The most common debts are credit card balances, mortgages, auto loans, personal loans and student loans. Who’s responsible for that debt? It depends on which state you live in.

In most US states, the debt belongs to the deceased person, not to family, and debts at death are paid off by using existing assets in the estate. That process is called probate and is handled by an executor (the person responsible for dealing with your will and estate after your death). If there aren’t enough assets to pay off the debts, creditors are paid first in order of priority, usually based on what’s available in the estate. Needless to say, if all assets are used to pay the debts, descendants and heirs get nothing.

WA and Other “Community Property” States

However, in nine US states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — your spouse is responsible for your debt at death. If a debt predates the marriage, then half of all property held in both spouses’ names (community property) is available to be used to pay off the deceased’s debt.

Some ways to make sure you don’t burden your family with debt after you’re gone:

  1. Know what debt you’re liable for, and have a repayment plan. Regularly check your credit balances. Are you listed on any loans? People who sign off on loans together are responsible for the entire debt. The same is true for a co-signer, who is responsible for the debt of the borrower.
  2. Make sure you have a will, financial and medical powers of attorney, and a living will (also known as an advance medical directive.)
  3. Update your records. In particular, make sure the beneficiaries listed on your accounts are still living and that you still agree with the designated beneficiary choices you’ve made; have your will, power of attorney, and living will up-to-date and readily accessible by your executor.

There’s a tendency to think that only those with a large amount of assets need an estate plan. However, almost everyone has an estate (at least some assets) and ideas about how those assets should be distributed after they’re gone. Making your intentions known through a will and an estate plan can greatly reduce the stress and trauma of death and make your heirs’ lives much easier.