Most people carry some form of debt throughout their lives, whether it is incurred through student loans, buying a car or getting a mortgage. Even people who have planned out their estates carefully may forget to account for this debt. They don’t realize that when they die, their debts are not wiped out.
So what happens to that debt when you pass away? The answer depends on a number of factors, including:
Where you live — Pennsylvania is not a community property state, though 10 other states are
The value of your estate
The type of debt you accumulate
Secured debt, such as loans for homes or cars, becomes the responsibility of the inheritor. But in most cases, your unsecured debt like credit card bills are the responsibility of your estate, which encompasses everything you own before your death.
The executor of your estate will be in charge of accounting for your debts, and they may choose to sell things, such as valuable jewelry in your name or real estate, in order to settle those debts. Heirs generally aren’t held responsible for unpaid unsecured debt.
But what about other cases, such as debt you cosigned on a loan for? Here are a few situations you should understand to ensure your family is not saddled with unexpected bills after you pass away.
Private Student Loans
When you pass away, the federal government will forgive your student loans. But if you took out private loans to pay for undergrad or graduate school, most companies will come after your estate to take care of your unpaid bills.
Many parents cosign loans for their children for first cars or other purchases. Look over the terms of the loan. If it includes a successor clause, then your estate takes over as the cosigner. Nothing really happens unless the primary borrower defaults on the loan, in which case your estate becomes responsible. If the debt cannot be recovered from your estate, the creditor has no other alternatives.
If someone else cosigned a loan for you, your estate will take on responsibility for the loan’s balance when you pass. If your estate cannot cover it, then your cosigner will inherit the debt.
Home Equity Loans or Lines of Credit
This type of secured debt may be taken on by:
Unlike with a mortgage, a creditor can require a home equity line to be paid in full right after your death. Sometimes creditors will work with a cosigner on a payment plan.
Taking Steps to Protect Your Heirs
No one wants to saddle their heirs with debt upon their passing. Here are a few steps you can take to protect your heirs from unwanted debt hassles:
Take out a life insurance policy: Neither the government nor private creditors can touch the money paid out on life insurance.
Invest more in your 401K: If you owe the federal government money, they can take it from your retirement funds, but private creditors cannot.
Make a will: Lay out what you want done with all your possessions and appoint an executor.
Pay down your debt: After all, the less you have, the less your heirs will inherit.
Still not sure how to protect your family from having to pay your debts when you die? Talk to the experts at Go Comprehensive. We can advise you on setting up a plan for your retirement and beyond. Contact us with your questions.