What Happens to Your Debt After You Die

While you ponder your mortality from time and time and think about the distribution of your assets, have you thought about what will happen to your outstanding debt?

In the past we have written about the need to appoint an executor you trust who will administer your estate in the most efficient way possible. One of the responsibilities of your executor is to take care of your outstanding debt. This is done by using the assets and property you leave behind to cover the balance. It some cases, this may require liquidation of property. Whatever is left over after your debts have been paid may then be distributed among your heirs.

Consider the following types of debt and what happens to it when you die:

Student loans — Federal loans are discharged upon death. Private loans, however, are not. In some rare cases, a private loan company may issue debt forgiveness, but it is unlikely. If you pass away with private student loan debt, the balance will attempt to be collected from your remaining assets and estate. Should your estate fail to cover the cost, the private loan company will then attempt to collect the debt from your spouse.

Credit card — If you are the sole owner of the credit card debt, then the credit card company will attempt to collect the balance from your estate. Should you have a joint credit card account, the co-signor of the account will be responsible for the outstanding debt.

Medical debt — In the event that you have medical debt, the funds from your estate will be used by your executor to cover the cost. Another person may take on the responsibility of your medical debt if they signed legal documents agreeing to do so. In the event that your estate is unable to pay off your medical debt, it will not be inherited by your heirs.

When drafting your estate plan, it is always a good idea to try and reduce the debt you owe by as much as possible, especially if you want to leave substantial property or assets to your loved ones. Any debt you accrue while you’re alive may deprive your family of the inheritance you intended for them to enjoy.