What Happens to Debt When You Die: What's Forgiven and What's Not

If you're walking around with more than your fair share of debt, you may wonder what happens to debt when you die. Will your loved ones be responsible for your debt after death, or is there debt forgiveness? Here, we'll break down which debts are forgiven upon death and which hang around like a spirit with unfinished business. We'll also help you develop a strategy to protect your beneficiaries from the weight of your debt after you're no longer around.

How are debts handled when you die?

What happens to your debt when you die? They become the responsibility of your estate. Simply put, your estate is the sum of the assets you own, including bank accounts, retirement accounts, investments, and property, minus any liabilities.

If you have a will, you probably named an executor to handle your estate after you're gone. Your executor will let your creditors know you've died, and legally, they can request payment out of the proceeds of your estate.

For example, if your estate is worth $100,000 and you owe $20,000 on a Mastercard bill, Mastercard must be paid before whatever is left of your estate can be distributed to your heirs. (We'll cover what happens to credit card debt when you die a little later).

Let's say your estate is worth $100,000, and you owe $200,000 in medical bills. The creditor will typically accept whatever is in your estate and write off the rest as a loss.

RELATED: What happens to a bank account when someone dies?

Are beneficiaries responsible for debts left by the deceased?

The only beneficiaries responsible for the debts left behind are spouses in community property states (more on that in a moment), and anyone who cosigned or jointly held an account with you. Other than those exceptions, beneficiaries are not responsible for your debt. However, they won't receive anything from the estate until creditors have been paid.

Unsecured debt

Unsecured debt involves any debt not secured by collateral, like a credit card or personal loan. If there are enough assets in your estate to cover the debt, it will be paid from your estate. If there's not enough to pay the debt (or to pay it in full), the creditor takes what they can get. Unless you live in a community property state, there's a joint account holder, or a cosigner on the credit card or loan, no one else has to pay toward the debt.

Credit card debt after death

There is no credit card debt forgiveness after death. That means the credit card company will request payment from your estate. Still, as long as you don't live in a community property state, there's not a joint account holder, and no one else cosigned on the credit card(s), no one will be responsible for paying the balance if your estate is not sufficient to pay it off.

Medical bills after death

When looking into what happens to someone's debt when they die, one of the most challenging financial categories to plan for is medical bills because there's no way to know how much end-of-life care will cost. Medical debts tend to be among the most confusing following death. If you die with lingering medical debts, the rules vary according to where you live. They may even vary depending on the size of the debt. In some areas of the country, your spouse could be responsible for any medical debt deemed "necessary," even if your spouse did not sign for the debt. An estate lawyer can be an invaluable asset if you die with medical debt.

IRS tax debt after death

The IRS will expect your estate to pay any taxes you died owing. Taxes are complex. The people you leave behind should work with an attorney to make sure they're paying what is owed but nothing more.

Secured debt

If you die with outstanding debt on a secured loan, like a mortgage or auto loan, your beneficiaries will have the chance to pay the loan off in full or take over the payments. In the case of a mortgage, beneficiaries can take over payments and keep the house. If you die with money owed on a vehicle, an heir can pay it off using proceeds of your estate or take out a loan in their name and refinance it. Otherwise, the property in question will need to be sold so the lender can recoup its money.

Mortgage loans after death

If someone cosigned for the mortgage or owned the home jointly, they will be responsible for keeping up with payments or selling the property. And if you live in a community property state, it's your spouse who will inherit the property and the mortgage associated with it.

One of the best things about leaving a home to someone (even though the house still has a mortgage) is that they can assume the mortgage without going through the application or approval process. The lender will not check their credit, income, or other qualifying traits they usually check. As long as the person (or people) you left the home to can afford the monthly payments, they can have the mortgage transferred to their names.

Note: There are many different types of life insurance policies. One type is referred to as "mortgage life." This policy promises to pay the mortgage off in full after the homeowner's death. The problem is, it's far more expensive than a standard term life policy and can't do anything a term life policy can't do.

RELATED: What is A Mortgage Note?

Home equity loans after death

If you live in a community property state, your spouse will inherit the home equity loan after your death. The same is true of anyone who cosigned or held the loan jointly.

And like a mortgage, the lender may allow your beneficiary to take over the home equity loan if they want to keep the house. If they are unable to make the payments, they'll need to see about refinancing the loan so they can afford it, sell the property, or allow the bank to foreclose.

Car loans after death

Your estate will have the chance to pay your car loan off. If the estate does not have the funds to do so, the person who inherited the car will need to decide if they want to keep it. If so, they'll need to take out a loan for the amount owed in their own name. Again, if the loan was cosigned, jointly held, or you live in a community property state, that person will be responsible for making the payments.

Can you inherit debt?

If your estate is not flush enough to pay off all of your debt, your loved ones can inherit debt in the following situations:

• You live in a community property state, and your surviving spouse must pay some of your debts.
• Someone cosigned a debt or was the joint account holder on a debt when you died.

Joint accounts

When you die, anyone who acted as a joint account holder on any of your debts inherits the debt and is responsible for paying it off.

Authorized users

An authorized user is someone you allow to use your line of credit while you are alive. They are not typically responsible for paying off old debt when you die.

Cosigning a loan

One reason cosigning a loan is such a big deal is because cosigners may be legally responsible for paying off debt after the death of the loan holder.

Community property states

If you live in a community property state, your spouse is responsible for paying off any debt you incurred while you were married. They are not responsible for paying off a debt you took on before marriage.

Filial responsibility laws

Currently, around 30 states have "filial responsibility" laws on the books. Filial responsibility laws hold that the adult children of an impoverished parent are legally responsible for covering the costs of necessities for their parent. To make it a bit more complicated, the courts do not necessarily divide the liability evenly among children. Rather, the court can consider which child is best able to pay the debt.

Because aging Americans typically rely on Medicare, Social Security, and Medicaid, these laws have rarely been enforced. However, according to Aging Care -- an organization that connects senior citizens with care providers -- some providers (like nursing homes) have recently begun to turn to filial laws to force adult children to pay their parent's care expenses.

What creditors can and can't take

Say you leave behind secured debt, like a boat or car loan. If your beneficiaries choose not to pay the property off in full or keep up with the monthly payments, the creditor can repossess the property, sell it, and recoup its loss. The same is true if you die with rent-to-own items in your name. The creditor will make plans to pick those items up.

Laws vary by state, but generally, a creditor cannot take the following:

Property that was not explicitly used as collateral: In other words, a creditor cannot take a car that is fully paid for, sell it, and use the proceeds to pay off another debt.

Credit card purchases: For example, a creditor can't take possession of a riding lawn mower you purchased using a credit card, sell it, and take their money from the sale.

Collateral used to secure an unenforceable contract: If you took a loan from a disreputable outfit and the contract you signed does not comply with your state's legal requirements, your beneficiaries are not required to continue paying on it.

Debt collectors

The thing about debt collectors is that they're not always entirely honest. By law, if there's not enough money in your estate to pay debts after you die, creditors don't have much recourse. That does not prevent them from lying to your loved ones by telling them they need to pay from their pocket. If you're putting together a plan for your family, you may want to add a reminder that debt collectors can't legally come after your beneficiaries after you're dead.

The exceptions to this rule include:

• If someone cosigned a loan with you
• If someone took on a debt jointly (and their name is on the account)
• If you live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. Or if you live in Alaska and have signed a community property agreement.

Note: Even if you reside in a community property state, laws vary by where you live. Make sure your spouse understands they should consult with an attorney who knows estate laws in your state before agreeing to pay anything.

Notifying creditors of death

When you die, it's up to surviving family members or the executor of your estate to let your creditors know. They will do this by mailing a copy of your death certificate to each creditor, along with a letter explaining who they are. In turn, your creditors will notify the three major credit bureaus (to prevent others from using your name or Social Security number to open new accounts).

How to protect your family from debt after your death

Death is difficult enough to deal with, without the concern of looming debt. You can make it easier on the people you love by doing these two things:

Leave a "when I die" notebook

Leave everything you need your loved ones to know about your finances in one place that will be easy to find. For many people, it's a "when I die" book. The book should include where you bank, passwords to important online accounts, who you owe money to, and how to contact creditors. How well you help prepare your heirs can make what happens when you die easier.

Life insurance

If you suspect you'll die with outstanding debt, consider keeping at least enough life insurance to pay the debt off after you're gone. How much life insurance you'll need depends on how much debt you expect to leave and if you plan to leave additional cash to loved ones.

And what about you? Can you inherit debt after someone you care about dies? Yes, if you're the spouse in a community property state, joint account holder, or cosigned a loan. Knowing that can help you develop a plan for what you'll do if that person dies before you.