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What debts are forgiven at death, and which debts can transfer to those you leave behind?

What debts are forgiven at death, and which debts can transfer to those you leave behind?
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While it might be an uncomfortable topic for some, contemplating now what debts are forgiven at death can help reassure that your finances won’t provide loved ones with problems once you’re gone. As a general rule, your estate will become responsible for any debt that you have on your death - your estate comprises all that you own. The task of paying your bills and then distributing what remains is known as probate.

The executor of your estate - who becomes responsible for taking charge of your will and estate upon your passing - will use the assets that you have to pay down your debts. As such, this could involve arranging for the withdrawal or transfer of adequate funds from a bank account, or in a more complicated scenario, might necessitate the sale of a property to raise the money that is needed. Ultimately, if the value of your estate is insufficient to pay off what you owe, then creditors will often lose out. 

Who pays debts after death?

Of course, what this also means is that there is unlikely to be anything left to distribute to your heirs. And importantly, in some situations, there is the possibility that your family could be liable for your debt. This will usually apply if someone has co-signed with you on a loan, if you’re joint owners or account holders on perhaps a credit card. 

Spouses who reside in community property states are also typically responsible for debt that they’ve accumulated jointly with their partner. In community property states, all assets acquired and any debts accrued during a marriage are effectively treated as if they are owned by both spouses equally. As such, community property can therefore be used to pay off debt, although surviving spouses should not be held responsible for any debts that accrued before the marriage. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are all community property states.

What debts are forgiven at death, and which debts can transfer to those you leave behind?

(Image credit: Getty)

Which debts can transfer after death?

Mortgages and home equity loans
In the case of an individual’s home, if the house and the mortgage is in your name alone, responsibility for paying back what remains on the mortgage, or a home equity loan, falls to your estate. However, if someone is to inherit the property directly, the onus can subsequently fall on them to either continue making the mortgage payments as before, or alternatively sell the property and use the funds raised to pay off what is still owed. Another option is that the executor utilizes other assets within the deceased’s estate to cover the mortgage ahead of the property being passed on. 

Note that the best mortgage lenders can ask for evidence that any new owner has the means to continue paying the mortgage, and can request that the mortgage be repaid immediately if the lender so wishes. Importantly, such rules don’t usually apply to family members.

If you have co-signed on a mortgage, you will subsequently be held directly accountable for any debt that remains if the other signatory passes. While joint owners who are named on the deed but are not co-signatories cannot be held liable for mortgage debt that remains outstanding on a property, if they are in a position to do so they will often consider taking on the debt so as to avoid their home being repossessed. 

What debts are forgiven at death, and which debts can transfer to those you leave behind?

(Image credit: Getty)

Should you want to ensure your mortgage is paid off when you die, mortgage protection insurance can usually be arranged to do just that. Alternatively, you may prefer to take out the best life insurance instead, which is usually cheaper and allows your beneficiaries to use the money that it pays at their discretion. So, instead of being compelled to pay the mortgage off in its entirety, they can continue with the usual payments as before, and use the funds as they see fit.  

Credit card debt
When it comes to the best credit cards, any money that is owed on your death will usually have to be covered by the assets that make up your estate. However, if there’s not enough to pay back the credit card balances that you held, the card issuer will ultimately miss out - this is because credit cards are a form of unsecured debt. As you might expect, if you hold the credit card account jointly with someone else, they will remain liable for what is owed. However, those who are merely authorized users on a card will not have any liability for the debt that remains. 

Auto loans
If you’ve taken out one of the best auto loans to finance the purchase of a car, this will usually need to be repaid from the estate that you leave. As these loans are a form of secured debt, the loan provider also reserves the right to take back possession of the vehicle if repayments are not maintained. If the loan can’t be covered by your estate, but an heir wishes to keep the vehicle in question, they can take on responsibility for the loan. 

Student loans
Should you still have outstanding student loans, all federal student loan obligations are discharged if you die, including federal PLUS loans that their parents may still have. The companies behind private student loans will also usually have no option for further action should there be too little money in an estate to pay back what they are owed. That said, co-signatories of private student loans taken out before November 20, 2018, may be held accountable for outstanding debt, while in community property states, the debt will pass to a spouse if it came about during the course of their marriage. There are some private student loan companies whose policy it is to forgive what they are owed if the borrower dies, including Sallie Mae and Wells Fargo. 

What debts are forgiven at death, and which debts can transfer to those you leave behind?

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The importance of estate planning

While there are instances in which your loved ones could be held accountable for your debt, these are often scenarios whereby you’ve entered into joint agreements, such as when taking out a mortgage. This is why it’s important to arrange appropriate protection such as life insurance at the same time, to ensure your family will be looked after financially once you’re gone. 

Regardless of whether you pass with debt to your name or not, the best final expense insurance plans can make sure your funeral and burial costs are taken care of too. But ultimately, if you want your final wishes to be carried out to the letter once you’re gone, making a will is the only way to ensure that this will happen. If money is a concern in life, the best online will makers provide an affordable way to make sure your intentions are followed exactly as you would want in death. Millions of people have recently started thinking about estate planning and wills, and if you haven’t already, there are good reasons why you should too

How to confront your debt 

If debt is causing you sleepless nights, it’s important not to let the problem spiral out of control. If you're in a position to pay something back, prioritize which debt you pay off first. Talk to your family and friends to see whether they might be able to help, and speak to those who you are in debt to as well. Lenders are more willing to listen than ever at this moment in time and will usually afford flexibility to borrowers who might be finding times tricky financially. 

If you have a lot of separate debts that you’re struggling to keep on top of, the best debt consolidation companies can often help you regain some control over what you owe. And if you’re stuck for someone to talk to, debt counselors are always on hand with invaluable guidance and advice.   

With over 20 years’ experience in the financial services industry, Tim has spent most of his career working for a financial data firm, where he was Online Editor of the consumer-facing Moneyfacts site, and regularly penned articles for the financial advice publication Investment Life and Pensions Moneyfacts. As a result, he has an excellent knowledge of almost areas of personal finance and, in particular, the retirement, investment, protection, mortgage and savings sectors.