July 26, 2023
- Olsen Breet
- May 27, 2021
Most people have debt throughout their life, which raises a question in mind if their family members will be responsible for paying off their financial obligations.
Everybody tries to keep debt as little as possible in their old age, but even little debt can threaten your family members.
Most people think that debt passes onto your family members after your demise, but this is not true.
After your death, your debt will be paid by your estate, and it will not pass on to your family members. However, there are certain exceptions to this rule.
How debts are paid after death?
When you die, the settlement of the debt eventually becomes a part of a financial process. It is not as simple as you think. Having told that your estate will pay off your debt, the value of your assets will be calculated.
No beneficiary is entitled to claim ownership over any assets until the entire debt is paid off. Once the debt is settled, the rest estate will be divided between beneficiaries. However, if the net worth is negative, lenders will determine the priority, and the rest debt will be forgiven.
When is your family obliged to pay off your debt?
Most of the time, your family cannot be held responsible for paying off your debt after your death. If you owe more than you own, the remaining debt will simply be forgiven.
This is clear that no person other than the borrower is responsible for paying off debts. Your financial obligations cannot pass onto somebody else.
However, there are a few circumstances when your family is accountable for settling your debt.
- If you have a joint account with your family member, they will be responsible for paying back the debt arising in that account.
- Likewise, if your family member has co-signed the loan agreement, they agree to the condition that they will be equally responsible for settling your debt if you fail to pay it off due to any reasons.
Some states prefer community property law. It means when you marry, all the assets and debts will be counted as community property and therefore, if one of you passes away, the other is accountable for their debt. Note that this does not include the debt that you take on before the marriage. Your partner cannot be held responsible for those debts.
How debts are handles after your death
You may have several types of debts ranging from small debts like instant loans for the unemployed and big loans like mortgages and auto loans. There is a pattern to be followed when it comes to settling your debt.
If you do not owe more than your estate, there is no concern about prioritising the debt settlement because all of your obligations can be settled instantly.
However, the problem occurs when your estate is falling short. In that situation, it is to be decided which debt to be paid off first. Here is how the debt priority is set out.
- Medical bills are paid out first when you do not have enough estate, and this is why other debts may not be paid off in that case.
- If you have an unpaid mortgage, your family member will have to refinance it and start paying it down. Otherwise, the lender will put it on auction to recover the lent money. If you applied for the mortgage with a co-signer, your children do not need to refinance it because the co-applicant is supped to pay it down.
- If you have an auto loan and there was no co-signer, the lender will take the car into its possession to liquidate it to recover the money lent.
- The joint applicant will pay all credit cards and lines of credit, and in their absence, they will be paid off by your estate.
After your death, your spouse can be chased by debt collectors. They can send notifications and harass with numerous calls. Although your estate is responsible for the debt settlement, and it can be forgiven if it is not sufficient, they can keep chasing and trying to guilt you paying.
They may intimidate you about debt payment out of moral reasons. No debt collector has the right to intimidate your spouse or any other family members, and hence they can simply write a letter to them to stop chasing them. When you die, your debts cannot pass onto your family member.
However, there are exceptions to this rule. Your estate will pay off your debt. It is always suggested that you should consult an expert to plan your estate. It can help you increase your wealth without putting an unnecessary burden of debt on your family.
Olsen Breet is our in-house Financial Expert at EasyPolicyLoans, with more than a decade of writing for various finance companies in the UK. He has got this knack for turning even the trickiest money matters into something we can get our heads around. Before he started sharing his wisdom here, Olsen was playing with big numbers and advising on loans at a bank. He graduated from University of Glasgow, grabbing a finance degree before jumping into the deep end of the financial pool. Olsen’s our go-to guy for making sense of market trends and is always ahead of the curve.