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Actions What Happens When You Die in Debt?
Key takeaways
- Debt doesn’t disappear when you die.
- Your estate will pay off outstanding debts after death.
- Purchase life insurance to help your loved ones handle your debt after you die.
More Americans are dying with debt than ever before.
In fact, 73% of consumers had outstanding debt when they passed away*,carrying an average total balance of $61,554, including mortgage debt. Without home loans, the average balance was $12,875*.
It’s important to understand that debt doesn’t die when you do and your current debt could become a burden for your survivors, especially if the value of your estate isn’t enough to cover your debts after death.
What happens to debt when you die?
The simple answer is that outstanding debt will be handled by your estate. Your spouse or family members aren’t responsible for paying your debts after you die unless one of them was a co-signer or listed as a joint owner for a credit card or other loan.
In nine community property states, however, a spouse could potentially be held responsible for their late spouse’s debt. You’ll need to consult an attorney if this status applies to you.
Unfortunately, your debt doesn’t go away
When your debt becomes part of your “estate,” or what you leave behind, it means your family and loved ones will inherit your debt as well as your possessions. And there could be a lot of both. Think about all the potential sources of debt:
- Credit cards
- Mortgage
- Lines of credit
- Student loans
- Car loans
- Medical debt
Who has to pay off the debt?
Your estate essentially represents your net worth—your property, bank accounts, investments, cash and other assets. What happens to debt when you die? The executor of your estate will pay those debts using available cash or with proceeds gained after selling your assets. The only debt totally forgiven when one dies are federal student loans; everything else will be handled through the estate.
If you’re facing debts after a loved one’s death with no estate and you aren’t listed as a co-signer or joint owner on the loan, creditors might be out of luck and the debt will go unpaid.
Protecting those you leave behind
If you want to leave a legacy for your family, your estate should include life insurance. Paying off debt should be your goal no matter what, but if you do die with debt, the death benefit from a life insurance policy can help your loved ones handle your debt after you pass away.
In addition to life insurance, retirement accounts and living trusts are typically off limits to creditors during the probate process of handling one’s estate.
Make smart estate planning moves to make sure you can leave most or all of your estate to your family.
Options for affordable coverage
In general, there are two types of life insurance you can choose from:
- Universal, or “permanent” life insurance, which can be pricey, but can last your entire life as long as your premiums are paid.
- Term life insurance, which is insurance you purchase for specific periods of time, or “terms.” Term insurance tends to be more affordable than universal.
You can buy either type of life insurance policy on your own, but it could be costly depending on factors such as your age, lifestyle, and line of work. A more affordable option could be to purchase it through your employer, union or professional association, many of which offer term life insurance at discounted group rates.
What you can do next
While it’s important to live for today, it makes sense to plan for tomorrow. It’s wise to have at least enough life insurance to settle any potential outstanding debt and handle your final expenses.
It’ll be hard enough for your loved ones to move on without you. Don’t make it more difficult by leaving them to pay your tab.
Footnotes
John Renz is a vice president and Creative Director at Prudential.
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