Most Americans have at least some form of debt, whether it is a home mortgage, an auto loan, student loans or some other kind of credit. In fact, many of us will carry various forms of debt for our entire lives.
But have you ever wondered what will happen to your debt when you pass away? Will your spouse be responsible for paying it off? What about your kids?
The answers to these questions depend on the kind of debt you have because various kinds of debt are handled differently upon death.
Your state also makes a difference. In community property states like Louisiana, your spouse is more likely to be on the hook for your debts, even if they weren’t a cosigner or co-applicant.
Credit cards: Your estate will be responsible for paying off the remaining balance if you were the single account holder. Credit card companies may try to go after family members to pay off the account balance if there isn’t enough money in the estate, but that doesn’t necessarily mean that they are obligated to pay under the law.
Student loans: Loans that are fully backed by the federal government will usually be discharged at death, so these funds will not come out of your estate or become the responsibility of family members.
However, private student loans are often another story. The lender may offer loan discharge because of death, or they may attempt to collect the remaining debt from your estate. They may also try to go after the loan’s co-signer, if available, or your spouse.
Medical bills: Medical debt generally comes out of your estate and is not inheritable. Some state, including Louisiana, have “filial responsibility” laws could hold your adult children responsible for your medical debt if you were elderly and impoverished, but this is rare.
Mortgage debt: If you left the house to someone, that person usually has the choice to keep paying off the mortgage or to forfeit the home. Alternatively, your estate could pay off the remaining mortgage debt.
A note about co-signers and guarantors: If someone has co-signed with you on a loan or credit card, then he or she can expect to get a call about paying off the balance if you were to pass away. The same is true for guarantors of loans.
As you can see, if you pass away with debt, most of the debt will come out of your estate during the probate process.
Before any of your estate can be distributed to beneficiaries, creditor claims have to be settled. If the estate doesn’t have enough funds, it is determined to be insolvent. Your family members and friends are generally not responsible for the unpaid debts, though they might choose to address the debts with the help of a lawyer.