What Happens to Your Debt When You Die?

A good credit score is invaluable during your life. However, what happens to your assets and debts when you die? Could your family pay the price for financial mismanagement late in life or be on the hook for your mortgage or credit card debt if you die unexpectedly?

Who Was Listed on the Account?

The first question that must be asked is who was listed on the account. If a credit card was in your name only, the estate must pay off the debt when it goes through probate. However, individual debts cannot be passed on to future generations. Therefore, creditors can only collect what money or assets the estate has at the time of your passing.

What If Others Were Listed on the Account?

If you had a joint credit card with your spouse or with a business partner who is now deceased, that debt could fall on the person who is still living. If you lived in a community property state, the entirety of the debt balance could fall on the surviving spouse. It is critical that you talk to a lawyer to clarify your situation and resolve any outstanding debt in a fair manner.

Creditors Cannot Add to the Debt While the Estate Is in Probate

A 2011 law passed by the Federal Trade Commission (FTC) makes it illegal for credit card companies to add fees or interest charges for missed payments due to the fact that a cardholder was deceased. Creditors are also limited in their ability to contact friends and family of the deceased to collect any money that is owed.

Retirement Accounts Are Passed to the Beneficiary

If there is an IRA or 401k account balance left over when a person dies, that money goes to a beneficiary. This money cannot be touched by creditors to resolve any remaining debt balance when someone dies. Proper estate planning before you die can keep other assets away from creditors to ensure that your heirs get everything that you wanted them to have.

When you die, your estate is liquidated to pay off your outstanding debts. If you have more debt than assets at the time of your debt, your creditors are out of luck. Unless someone cosigned on a loan with you, no one else is responsible for paying your debts. Have you had to deal with an estate going through probate? Let us know about your experiences in the comments section.