Debt has a habit of sticking around with us no matter how many years go by. Whether it’s the mortgage payments, the vehicle payments, or the never-ending student loans, it can feel like we may be stuck in this cycle forever.
I’m Concerned About Leaving Debt To My Children
One of the main stressors for seniors in debt is they do not want to be a burden on their family. It’s bad enough you are drowning in debt but you certainly don’t want your kids to have to take over the payments when you die.
Unfortunately, there are situations when your children may be responsible for your debt. In this article, we will discuss the types of debt that disappear after your death, and the ones that can stick around.
Understanding Different Debts
The type of debt you have is entirely dependant on what happens to it after you pass away. You may have:
- Credit Card Debt (Consumer)
- Mortgage Debt
- Home Equity Line Of Credit
- Student Loans
What Happens To Your Debt Immediately After You Die
When you die with any amount of debt, your property (estate) will go through probate and any unpaid debts will be paid out of your belongings or savings. Whoever is your beneficiary for your property is known as the executor.
The executor is responsible for working with the companies that are owed money and using the property or funds from your estate to settle the debts. There are a few caveats that we will go over because not all of your accounts are subject to the probate process.
How Credit Card Debt Affects Your Heirs
If you have outstanding credit card debt when you die and the sole owner of the debt, the credit card companies or creditors will attempt to recoup any of the outstanding debt through the probate process.
In the event there is not enough money left in your estate to pay off the credit card debt, the credit card company can not force your heirs to pay the debt. The creditor will write the unpaid debt off as a loss.
However, if the credit card is a joint account or there is a cosigner, the other person on the account will be required to pay off the debt. If you have authorized another person such as a child to be a “user” of the account but they are not a joint owner, they will not be required to pay off the debt.
Is My Spouse Responsible For My Credit Card Debt?
If you are married when you die and your spouse is still alive, your spouse may be required to pay off your credit card debt in certain situations. Even if your spouse is not listed as an account owner, certain states consider marriages to fall under community property laws. This means your spouse may still be stuck with your debt even if they are not listed on the account.
The states with community property laws are:
- New Mexico
What Happens To A Home Loan Upon Death
Unfortunately, home mortgages are not forgiven as easily as credit card debt. If you pass away and still owe money on your mortgage, your executor will have three options to deal with the outstanding debt:
- Sell the home to pay off the debt
- By selling the home, the executor can use this money to pay off part or all of the home mortgage. In the event of other unpaid bills, the sale of the home can be used to pay off these debts as well.
- Pay off the mortgage
- If you have enough other savings or estate value, your heirs can pay off the mortgage with these funds and own the home outright.
- Continue making payments
- If your heirs want to keep the home but do not have the money to pay off the property, the lender will usually allow them to continue making payments until the debt is paid off.
What About A Home Equity Loan?
If there is a home equity loan on the property, the lender can force the sale of the home to pay for the outstanding balance if there is not enough money in the estate to pay it off.
However, as with a mortgage, lenders are usually flexible to let heirs take over payments if they have decent credit scores.
How To Protect Your Heirs From Debt When You Die
Most debts will not be passed on to your heirs if they are not cosigners or a spouse. However, this doesn’t prevent the lenders from taking all of the money out of your estate to satisfy the debts.
If you want to leave a legacy for your heirs, there are a few things you can do.
Leave Your Heirs Money With Life Insurance
Life insurance is a great way to hide your money from lenders and are usually exempt from taxes. If you want to leave money for your heirs, a term life policy may be the perfect fit and is usually quite affordable.
If you have a term life insurance policy in place when you pass away, the creditors cannot go after this money. This money will be given to your heirs (usually tax-free) and can be a great way to leave a lasting legacy if you struggled with debt during your life.
Protect Your Money Through Retirement Accounts
Usually, employer-sponsored retirement plans with listed beneficiaries do not go through the probate process. This is good news if you have built up a substantial IRA or 401k.
The word “usually” was used because probate laws do vary slightly between states. To find out about your particular state laws related to probate, be sure to contact an estate attorney for further clarification.
Debt can be extremely scary especially if you are worried about leaving your financial mistakes to your children. Luckily, in most situations, your heirs will not be responsible for taking on your debt outside of the value of your estate. Unfortunately, you may end up leaving your heirs to deal with a probate mess and little or nothing left as an inheritance.
Luckily, there are other avenues you can use if your concerned about leaving an inheritance to your heirs. This can be done through employer-sponsored retirement accounts such as a 401k or an IRA.
In addition, life insurance policies are a great way to leave a financial legacy to your heirs without leaving the money exposed to your lenders.
Author Bio: Ryan Luke is a father of three, a husband, finance blogger, and full-time police officer. Through proper budgeting and money management, they have been able to live off one income and build wealth at the same time. As an active member of the personal finance community, his goal is to educate and help people get out of debt and build wealth!