When you die, your debts do not. Your executor will be required to pay them using your assets. That means that any unpaid debt can reduce the wealth you’ve left behind for your heirs. In some cases, your family members could even need to pay your debt.
Reader’s Digest’s recent article, “This Is What Happens to Your Debt When You Die,” explains that not all debt is created equal. With secured debt, like a mortgage or car loans, your estate can either pay off your debts in full or continue making installment payments. Another option is to sell the property or turn it over to the lender to satisfy the debt.
However, any unsecured debt, such as credit cards, bills, or personal loans, is typically just paid from the estate. The estate is everything you own, such as assets, bank accounts, real estate and other property.
Note that student loans are the exception, but there are some caveats. Most federal student loans, along with private loans without a cosigner, are discharged with proof of death. Thus, your heirs won’t be responsible for those loans. However, if your private student loan was cosigned, that person will be required to pay it off. There are also some loans, like PLUS loans, that while technically forgiven, could leave the parent who took it out with higher taxes.
The way to protect both yourself and your family, is to speak with an experienced estate planning attorney to get your affairs in order.
Creating an action plan for your outstanding debt is a critical component of the estate planning process. You also need to ask about other end-of-life plans, like medical directives, wills and trusts to manage your assets, when you pass away.
You should also review your life insurance policy to make certain that it’s up-to-date, and don’t forget to review your named beneficiaries.
If your beneficiaries are assigned correctly, some of your assets may bypass probate and be protected from creditors. Therefore, anyone who’s listed on your policy won’t be forced to hand over their money to satisfy your debt.
Reference: Reader’s Digest “This Is What Happens to Your Debt When You Die”