When it comes to money management, there may be no topic more emotionally charged than inheritance.
That’s true whether you’re planning your estate (figuring out what will happen with your money and property after you die) or if you might inherit something from a loved one. If you’re planning your estate, you could worry about what happens to your outstanding debts or, worse, if they might impact your loved ones after you die. And when you’re dealing with the loss of someone special, wondering how their financial past could affect your future might make you feel even more overwhelmed.
Knowing what happens to debts after death can help you feel more prepared and even alleviate some your concerns. To put your mind at ease, we’ve got answers to some of the most common questions about inherited debt.
While some debts, like federal student loans, essentially go away when you die, not all forms of debt are handled this way. That doesn’t mean your loved ones will need to dip into their personal finances to cover your debts. Instead, the estate executor will take care of any outstanding debts using the money and property you left behind.
After you die, your creditors have a right to file a claim against your estate for the money you owe. That money would come out of your estate, along with any other expenses like funeral or burial costs, if you left behind enough money or property to cover them. Then, the remaining funds are released to your heirs according to the instructions in your will.
If you didn’t leave behind any money or property or your debts are worth more than your assets, any remaining balance on your debts goes into default. But as long as you were the only name on the account and did not have a co-signer, your loved ones won’t have to pay your outstanding debts.
However, if two or more people owned the account, your co-signer or joint borrower is now on the hook for the balance. For example, if you shared a credit card with your partner, it becomes your partner’s responsibility after your death.
Don’t worry, your loved ones can’t be forced to take responsibility for the remaining mortgage if it’s in your name. But if they want to keep (or sell) the home, they’ll need to talk to the mortgage company about assuming the loan and avoiding foreclosure.
If your estate can’t cover your car loan debt, your loved ones can allow your creditor to repossess the car. If they want to keep the car, they’ll need talk to the creditor about assuming the debt. They can also sell it to pay off the loan.
Personal loan debts won’t burden your loved ones, as long as you’re the sole owner on the account, but they will be paid out of your estate. However, if there’s a living co-signer or joint borrower on the loan, they’ll still be responsible for the paying the full balance.
If you find yourself solely responsible for a debt you co-signed or jointly borrowed with someone who died, you may be feeling overwhelmed. Take a deep breath. Becoming solely responsible for debt doesn’t have to affect the rest of your life, and you have a few options to handle it:
- Sell assets and collect life insurance or retirement benefits: If you inherited assets other than cash, selling them may be the simplest way to pay off unexpected debts, especially if you inherited a car or home. If your loved one had a life insurance policy or retirement plan, check whether you’re entitled to life insurance proceeds or retirement benefits. While creditors can file a claim against your loved one’s estate, these assets may be exempt in some states. Make sure you receive what you’re entitled to, so you can use those funds to pay down your debt. Consult with a lawyer or financial adviser for your particular circumstances.
- Contact your creditors if you need help: While it can be tempting to ignore unexpected bills, reach out to your creditors for help. Most lenders will work with you to find a debt repayment plan you can live with. And some may either settle for less than their original balance or adjust your interest rates to make it more affordable.
- Consider refinancing or consolidating debts: Handling multiple debts can be stressful, not to mention costly, if you are left as the only debtor on high-interest debts.
Consolidating your debt by taking out a personal loan to cover the balance can help. It streamlines debt repayment since you’re making a single monthly payment instead of paying each creditor separately.
Taking out a personal loan may also help save you money. If you are now the only borrower on higher-interest credit card debt for example, you could pay thousands of dollars in interest by the time you pay it off. A personal loan with a lower interest rate than your credit card means you’ll pay less interest, so you can pay off debt faster.
Becoming the only borrower on debt you weren’t expecting is never easy, but it can be manageable. Our debt consolidation calculator can help you estimate what you might save if you combine those multiple debts into one.Debt Consolidation Calculator