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Does debt die with you?

minute read

    Suffering from the loss of a friend, family member or loved one is often overwhelming. The pain of grief can be taxing and exhausting as you try to manage the aftermath of their death. The last thing you want to be thinking of is their financial situation. However, it's an important part of the process as debts could be left unaddressed — and end up being your responsibility.

    Many people over the span of their lifetimes have accrued some form of debt — mortgages and loans are prime examples — but an individual's estate can also accrue debt.

    You may be wondering then, what happens to their debt when they die?

    In short, assets pass onto the estate, and depending on state law, unpaid debt may be required to be the responsibility of someone who shared the debt. For example, joint account owners, co-signers of any type of loan (including mortgages) or a surviving spouse named on the account.

    In this article, we'll cover what you should know about the topic of inherited debt, including:

    • Kinds of debt that can be inherited
    • Types of assets that are protected
    • What happens if there's no beneficiary listed
    • Dealing with debt after the death of a family member

    What kind of debts can be inherited? 

    Not all debt is treated equally when it comes to inheriting and assuming responsibility. In general, the following are treated as inherited debt:

    • Mortgages
    • Joint debt (including late payments for rent or credit card debt)
    • Co-signed debt (such as car loans)
    • Medical debt
    • Community debt/property (if you live in a community property state, credit accounts opened while you're married typically turn into joint accounts)

    Inherited debts may be addressed differently depending on certain factors including state of residence of the deceased and laws governing inherited debt. For example, community debts apply to the following states:

    • Arizona
    • California
    • Idaho
    • Louisiana
    • Nevada 
    • New Mexico
    • Texas
    • Washington
    • Wisconsin

    Even if you don't live in one of these states, other co-signed debts like unpaid medical bills or car loans fall on the co-signer to pay off as inherited debt. Should there not be any money left in the deceased's estate to pay off certain bills, it's possible that debt will remain unpaid.

    However, just as one can inherit debt from a spouse or loved one, there are protected assets you can also inherit. Let's explore these more below. 

    Which types of assets are protected?

    Even if a person owes debt after they die, some assets remain protected and won't be allowed to be collected by the state or used to pay off other debts. Instead, these assets go to the beneficiary. A beneficiary is someone who has been officially listed on a legal will or trust and chosen by the benefactor to receive certain assets upon death. If your loved one listed you as a beneficiary, you have the right to the money and assets they've left for you.

    Assets that are protected and may be legally designated to beneficiaries include:

    • 401 (k)
    • IRA and retirement accounts
    • Trust funds
    • Life insurance policies 

    What if there's no beneficiary listed?

    If someone doesn't list a beneficiary on policies and they pass away, there are a few ways this could go depending on what the assets are and the specific state laws governing estates. For example, a 401 (k) account with no beneficiary may go to the surviving spouse or divided among the surviving children. Assets could also go towards the estate and then be distributed by an estate administrator, called an executor, who will help manage and distribute assets to the beneficiaries listed in the will.

    If no remaining relatives are alive, the assets may be further assessed in probate, a process where remaining assets and debts are distributed and paid off, respectively. An estate administrator appointed by a legal representative may assist in taking on the responsibilities of this process, which is contingent on state laws and regulations.

    Typically, an individual will designate multiple beneficiaries to ensure assets are protected and that items such as 401 (k) accounts and insurance policies don't end up in probate. 

    Dealing with debt after death of a family member

    The death of a loved one is overwhelming, painful and stressful. Your first thought might not be whether or not you have to pay off debt of a deceased parent or sibling.

    However, debt collectors may contact you about your loved one's outstanding debts, and this can feel overwhelming or confusing. Below are a few steps you can take to help you through this difficult process.

    Know your rights

    The Fair Debt Collection Practices Act (FDCPA) holds collectors accountable for what they can/can't do. If they violate rules such as harassment, you can submit a complaint. Keep in mind that a collector can't make you pay off these debts unless you are legally obliged to, such as a joint account or if you were a co-signer.

    Hire a lawyer

    Whether you hire a lawyer or have a trusted friend or family member who is a lawyer to represent you, enlisting someone to protect you and your assets is a wise decision. This is especially relevant if the financial situation of the deceased is complex and/or murky, thus warranting a professional assessment to determine who will assume debt responsibility (among other matters).

    If you are struggling to find or afford a lawyer, there are legal aid offices and clinics you can contact with a little research online. 

    Send the death certificate to creditors and credit bureaus

    One immediate step you can take is to send a copy of the death certificate to both creditors and credit bureaus. Doing so will pause them from trying to collect the debt while you process and distribute assets to the proper beneficiaries. This can also pause any activity if someone is trying to use the credit card account or trying to open lines of credit under the deceased's name.

    If you're assuming debt from the death of a loved one or receiving assets as a designated beneficiary, you may want to request an updated copy of your credit report. Doing so can help you assess how your score has been impacted by this very difficult event.

    Take care of yourself

    Grief is painful — if you're dealing with the aftermath of a loved one's death, it can feel like another weight while you process everything. Even if you feel ready to assess the financial situation of the deceased, you don't want to make any major decisions about an estate and debts while under too much stress.

    Lean on support systems — friends, family, loved ones and financial advisors or legal professionals — to help take some of the weight off your shoulders. As you handle the finances of the deceased, take ample breaks and don't forget to have some compassion for yourself during this most trying of times. With some help, proper mental health care tools and time, you can settle the estate and get some closure. 

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