Who Inherits Your Debt After Your Death? You’ll Be Surprised to Find the Answer

Even wondered what happens if a person passes on when they are knee-deep in debt? Of course, if they owned lots of valuable assets, these can then be used to pay off any outstanding amounts. However, if they had nothing, it becomes a whole other ball game. The burden could even fall to those who survive the deceased, compounding an already difficult situation.

According to Experian data, at least 73% of deceased adults passed away with outstanding debts in 2016. Back then, the average balance per individual was $61,554 inclusive of mortgage debt, or $12,875 excluding it.

In 2016, 73% of deceased adults were in debt at the time of their death

Did your jaw just drop? It would be understandable, as these are insanely huge amounts. There’s, therefore, need to find out what happens to debt after your passing, and how you can protect your loved ones in the event of such an unfortunate occurrence.

One-off Situations

Philip Ruce, a Minnesota attorney with special interest in estate planning says that most children fear that they will inherit their parents’ debts, and the fear is the same between spouses. However, the lawyer says that inheriting debt rarely happens, but there are those one-off situations.

Naturally, a deceased’s estate is usually responsible for any unpaid debts. In the case of secured loans, assets attached are sold and proceeds used to pay off the creditors, or they can decide to repossess the asset and handle it as they see fit. The goal, after all, is for the lenders to recover their money.

A deceased’s estate is responsible for any unpaid debts

However, if a family member is unwilling to let go of said asset(s), then they have no choice but to come to an arrangement with the lender on how they’ll continue making payments in service to the amount owed.

For unsecured loans, the first order of business is usually to pay them off with available estate funds, and that is before anyone receives a dime in inheritance. But what if the available funds aren’t enough to service all debts?

As the attorney puts it, such an eventuality deems the estate insolvent. It is, therefore, upon the personal representative or executor to engage the probate system and determine which debts take precedence, and in which order they are to be paid. Once these are paid off and all funds are depleted, any outstanding amounts to which the deceased was solely responsible for are then discharged.

Co-signed Loans

If it just so happens that the deceased had a co-signer when taking out these loans, however, this other party remains responsible for the debt. Depending on the creditor’s policy, Ruce says that the co-signer may find themselves in a tough spot where they are required to pay off the outstanding amount immediately and in a lump sum. Such cases are rare though, the attorney affirms.

If it was a co-signed loan, the co-signer steps up to take responsibility

So, how can you protect your loved ones from such scary situations? For starters, understand all terms before taking out any loan. Make sure to inquire what happens in the event of your death, then discuss it with your family before making the final decision.

Also, keep accurate records on all debts you’ve taken out, and provide your loved ones with easy access to all your accounts. And according to Huffpost, taking out a life insurance policy could help your family pay off debts when that time comes.