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Updated on Monday, January 21, 2019
Being in significant debt can be stressful and all-consuming. Often, what keeps people going is the thought that, one day, their debt will be paid off and they’ll have a clean slate.
But what if that debt never gets paid off? A 2017 report from Credit.com found that 73% of Americans die with debt. We’re not talking about $1,000 here or $2,000 there. The average American who died with debt had over $61,000 of it. This debt ranged from credit cards and mortgages to personal loans and student loans.
You might be wondering what happens to this debt when you die. Can a spouse inherit it? What about a child? We’ve explored the nuanced topic of inheriting debt below.
What happens when a person dies with debt?
When someone dies, the legal process of probate begins. This is the process in which the decedent’s estate — or the estate of the person who died — is distributed among creditors and any beneficiaries.
A personal representative is appointed to take charge of the deceased person’s assets and liabilities, said Bill Kirchick, a partner at Nutter McClennen & Fish LLP law firm in Boston and an officer of the National Association of Estate Planners & Councils.
If the person who died named someone in their will as an executor, this person will be the representative. If no one was named or there was no will, the probate court will appoint someone to serve this role.
The personal representative will then use the deceased person’s estate (which includes one’s savings and any other assets, such as a home, car and anything else the person owned) to pay off their debts. The personal representative will also be responsible for paying the monthly bills using the estate until things are settled.
“If you die with a will, everything goes to the terms of your will,” said Sarah Carlson, a CFP with Fulcrum Financial Group in Spokane, Wash. “And then a probate judge would oversee [everything] and your executor would help in that process. If you die without a will, then the state laws will govern how your assets get distributed.”
Can that debt be inherited?
Although this topic is fairly complex, the general rule of thumb is that debt cannot be inherited by the family member of a deceased person. There are, of course, exceptions to this rule, such as when someone cosigns on or guarantees a loan, or if someone lives in what is called a community property state. Below, we explore the nuances of inheriting debt.
When a parent dies
Generally speaking, a child cannot be held responsible for any debts their parents held when they died. Kirchick said children shouldn’t be worried about their parent’s debt or concerned that their parent’s creditors are going to come for them.
But if you cosigned on a loan for a parent or were a guarantor on a loan for a parent, you will be responsible for this debt, Kirchick said.
When it comes to a mortgage, things get a bit more complicated. If a parent leaves a child their home but it is not fully paid off, the child will likely have to sell the home and pay off the mortgage. Then they could keep any excess proceeds. If a child cannot sell the home for an amount that will cover the mortgage, they should consider consulting an attorney for advice regarding a potential foreclosure or short sale to remedy the situation.
When a spouse dies
If your spouse dies, you typically cannot be held responsible for any debts that were solely in their name. But this changes if you live in what’s called a community property state. “In a community property state, you take on the debt of your partner,” Carlson said.
In community property states, any debt obtained in a marriage is considered the responsibility of both parties, even if one partner was not involved in the debt or didn’t know about it, Carlson said. The community property states in the U.S. are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
In a community property state, for example, credit card debt — even if it’s only in one spouse’s name — can be the responsibility of the other spouse, Carlson said. In a noncommunity property state, you could likely argue that the credit card debt was only held by the decedent.
Talk to a lawyer
If you’re the executor of a will or the court-appointed personal representative for someone who has died, it is wise to speak with a probate attorney.
“Anytime you sign yourself onto any obligation, I think you owe it to yourself to review it with proper legal counsel,” Kirchick said.
An attorney can help you navigate the probate process, and will be especially useful if the person who died had numerous outstanding debts.
Inheriting debt FAQ
Below, you’ll find the answers to some common questions related to inheriting debt.
Unfortunately, if you cosigned on a loan, you will be responsible for that loan. The same applies if you were a guarantor on a loan for someone who died.
“A cosigner would be an obligor — absolutely,” Kirchick said. “And how about guarantors? I’m not signing on your loan, but I’m guaranteeing it. Well, the guarantor is responsible as well.”
If you live in a noncommunity property state, the answer is likely no. You cannot be held responsible for the credit card debt of someone who died if you were solely an authorized user. But if you were a joint holder of the account, you will be responsible for the debt.
(In a community property state, a spouse will likely be liable for the debt even if they were just an authorized user on the account.)
It depends. Some federal student loan programs offer forgiveness for the cosigner when the primary borrower dies. But many private student loans do not, and the cosigner will likely be liable for the debt.
Kirchick said it varies from state to state, but the general rule of thumb is that creditors have one year from the date of death to establish claims against a debtor who is deceased. This means a creditor would have to establish a claim with the probate court or the successor in interest within this one-year period.