What to do When Facing the Reality That Your Debt Will Outlive You

Key Takeaways
  • High levels of consumer debt meanmany people every year die with outstanding bills.
  • Creditors often attempt to collect debt from heirs, even if they have no legal obligation to repay.

When a loved one dies, the last thing you want is to deal with calls from creditors, yet this often happens when there are outstanding bills at the time of death. In many cases, you have no legal obligation to pay the debt, even if you are the deceased’s spouse or child. Understanding the basics of estate settlement can help protect you from bill collectors.

The Current Status of Consumer Debt in America

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The New York Federal Reserve reported that as of April 2020, total household debt eclipsed $14.3 trillion, the highest level in history. The figure includes all consumer debts, including mortgages, car loans, student loans, and revolving credit card balances.

In 2020, Generation X held the highest debt balances of any age group, with an average balance of $135,841. However, Baby Boomers, ranging from 56 to 74, still had an average of $96,984, and the Silent Generation, consumers over 75, held $40,925 in debt.

Failing to eliminate consumer debt means a higher cost of living in retirement. It also increases the chances of dying with debt, leaving heirs to decipher what bills need paying and which ones don’t.

How Debt Impacts the Estate

During the probate process, creditors make a claim against the estate for any unpaid obligations. The executor must repay creditors from the estate before distributing assets to heirs.

How Debt Collectors Receive Payment After the Death of An Account Holder

Debt collectors often pressure heirs to pay the outstanding debts of loved ones. However, to receive payment, the creditor must place a claim against the estate. The executor will distribute payments to creditors based on a priority system. If the estate has insufficient assets to fully pay all creditors, those with the lowest priority go unpaid.

Creditors will collateralized debt can repossess the asset to settle the unpaid balance.

What is the Survivors’ Responsibility for Outstanding Debts?

Generally, heirs in non-community property states are not responsible for any outstanding bills. The exception is accounts held jointly or co-signed, which becomes the surviving spouse or child’s responsibility.

In community property, both spouses remain liable for debts, even if only one spouse signs the contract. The exception would be debts incurred outside of the marriage.

What to Do (And Not to Do) With Your Debt Before You Die

Don’t convert unsecured debt to secured. Secured debt uses a form of collateral to protect the lender in the event of a default. Collateralized loans go through the probate process and receive priority treatment for payment. Securitizing unsecured debt means the creditor will get paid or will take the asset.

The exception is a property titled or deeded jointly with right of survivorship,which automatically passes to the living spouse without going through the probate process. The transfer process varies by state.

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Hold debt separately. Any debt held jointly becomes the responsibility of the living account owner. This is true for accounts owned jointly or co-signed debt for a spouse, child, or friend. Instead of owning unsecured debt jointly, add the family member as an authorized user, which gives the user access to the account without transferring any responsibility for repayment.

Bypass the estate where possible. It is often possible to bypass the estate through account titles and beneficiaries. Any assets that pass through the estate must go through the probate process and repay creditors before distribution to heirs.

Assets with direct beneficiaries and joint titles pass directly to the heirs, bypassing the estate. Life insurance, investments, bank accounts, and college funds are a few accounts that allow direct beneficiaries. Titling a bank account as POD (payable on death) will assign an heirto the account.

  • What happens to my debt when I die?

    After death, remaining balances become the responsibility of any co-borrower or the estate. Probate allows creditors to make a claim against the estate and receive payment before distributing assets to heirs

  • Will my heirs inherit my debt?

    Unlike assets, debts are not transferred to loved ones after death, except in community property states. When multiple parties hold debt, the remaining owner(s) becomes responsible for payments.

  • Does student loan debt go away if the borrower dies?

    Yes. The estate can send proof of death to the loan servicer. The servicer then discharges any remaining balance.