Have you ever wondered what happens to your unpaid bills after you die? You might be surprised to know that it depends on what kind of debt is still outstanding.
In most cases, your estate will have enough assets to pay off all bills—assuming you have a positive net worth at the time of death. But understand that life insurance proceeds, retirement and annuity accounts and brokerage accounts are left outside the estate—and therefore cannot be forced to pay off debts. Your estate’s actual net worth may not be as great as you think it is.
Your executor will review the assets and debts in your estate and prioritize the debts according to some fairly straightforward rules. Certain creditors, similar to those who issue medical or mortgage bills, must be paid first. A probate court will decide which remaining debts go in which priority, unless there are clear directions in your will.
Mortgage debt normally passes to the spouse or partner whose name is also on the loan documents, but if there is no joint mortgage holder, and the estate has insufficient funds to pay the mortgage, whoever inherits the home can usually move in and resume making the mortgage payments. The rules are different with home equity loans; with these, the bank can demand that whoever inherits the home (and the loan) immediately repay the outstanding balance; however, this is not required of the lender; in many cases, the bank will agree to let the heir continue to make the loan repayments on schedule.
Auto loans work similarly to mortgages; the estate handles payments if the money is available. If not, whoever inherits the car has the option to continue making payments or selling the vehicle to cover the cost of the auto loan.
What about credit cards? Any joint account holder is liable for the debts after the co-account holder dies. But if you’re the sole account holder, the credit card cannot go after any unpaid debts from your estate when you die. Spouses who live in community property states may or may not be liable for the outstanding debt.
Student loans are typically paid out of the estate, but if those funds are not available, the loan provider cannot force anyone to pay off the loans, since they are unsecured; however, if there is a co-signer for the loan, that person is liable for repaying the debt. Once again, however, a spouse in a community property estate may be liable for student loans incurred during the marriage.
Many financial planners will recommend a term life insurance policy for a specified time for people who are still building their financial lives, to avoid burdening the family with debt in the event of premature death. And of course, everybody should have a will, and the will should clarify where the existing financial accounts reside and how to access them. A little upfront planning can save having to deal with a mess later on.