What happens to your debt after you die?

Do you feel like your debt is forever? Well, it may not be. Your debt may outlast you, but in some cases, your debt goes away after you die.

Hot on the heels of a discussion on whether you need life insurance, let’s return again to that happy subject: your inevitable death.

But remember, that this can actually be a happy, loving subject, because you’re really just thinking about how to take care of the ones you love.

So let’s go through the various possibilities.

Your estate

First, let’s talk about your estate. The value of your estate is defined as the sum total of your assets minus your liabilities.

When you are gone, your executors/beneficiaries, basically whoever is in charge (or the state if no one is designated) is put to the task of “settling” your estate. This means that any outstanding liabilities you have will be paid off by your assets, if possible.

If it’s not possible, then some debts may be needed to be covered by someone else, like if there’s a co-signer on a loan, or joint account holder on a credit card. There are a few other situations as well.

And if there is no one else to cover the debt, the debt may just not be paid.

Student loan debt

Good news for those with student loan debt that never seems like it’s going to go away! If you have federal student loans, they get automatically discharged when you die. Hooray! They won’t follow you into the afterlife!

Private student loans are a little different, and they get treated like any other liability in your estate. So if you have a co-signer or spouse, they may be responsible, and if not, it’s just another debt to be settled from your assets.

Credit card debt

Credit card debt isn’t treated specially. When you die, it’s just another asset. If your estate has the assets, it will be paid off, otherwise, it won’t, unless there is a co-signer.

But it’s worth noting here that unsecured debts like credit credit cards are lower down on the priority list, when compared to…

Mortgage debt

Mortgage debt is often the biggest debt that anyone has, and that debt still needs to be paid back, even after your debt.

The same rules apply if there is someone else is associated with the mortgage other than you. But if not, your spouse or a beneficiary may be able to either take over the mortgage or sell it to recoup money. But if that doesn’t happen, the mortgage company can foreclose on the home. (That may or may not be a bad thing.)

Car loan

A very similar situation exists for car loans as mortgages. The spouse/co-signer or heir inherits the debt (and the car). If the debt isn’t assumed or paid off, the car can be repossessed. Or, the car is sold to pay off the debt.

Timeshares

Timeshares are not a standard debt, and are a whole subject unto itself, but it seems relevant to mention it here. If you own a timeshare, know that your heirs do not need to inherit it if they do not want, even if the timeshare has a “perpetuity clause” in it (and what a scary thought that is).

Your heirs, even if they are set to inherit the timeshare, can file something called a “Disclaimer of Interest” which is a formal renunciation of the inheritance. Basically, it’s a refusal to inherit. It’s a formal process, and like everything you’d best speak with an attorney, but it is an option.

Bottom line

In most cases, your assets will serve to pay off your debts after you die. In some cases, however, debts that you owe can cease to exist.

Does that mean that you should go wild and pile up debt, knowing that you and your heirs won’t ever have to pay it off? Well, that’s certainly an option, but before you pull out that credit card, I might invite you to think twice.

As always, make sure you speak to an attorney, whether you’re the one managing your assets or the one dealing with them.

Remember, getting your financial affairs in order while you’re still here can be a blessing to those who you leave behind.