The average American has about $29,800 in personal debt, not including a mortgage.¹ And while you might think all your financial problems will die with you, it’s possible your family could inherit your debt. Talk about unfinished business!

Don’t let your debt come back to haunt those you love. By taking control of your money now, you can feel confident that you’re leaving behind a legacy you can be proud of.

Who Is Responsible for Your Debt After Your Death?

The answer? It depends.

As a general rule, any debt that’s in your name only (that’s key) gets paid by your estate after you die. (Your estate is simply all the assets you owned at the time of your death—like bank accounts, cars, homes, possessions, etc.) The executor of your estate (a trusted person you appoint in your will) is in charge of making sure everything is taken care of: They’ll handle your assets, give your family their inheritance, and pay off your debt, if necessary. This process is called probate.

So, let’s say you had $100,000 of debt when you died, but you also had a paid-for house worth $200,000. The executor of your estate would sell the house to cover your debt, leaving $100,000 (minus any necessary fees) of inheritance to your heirs.

But what happens if you have more debt than estate? Well, things get tricky.

Secured vs. Unsecured Debts

In the case of insolvent estates (those where the debt equals more than the value of assets), there is a certain order in which creditors (the people you owe money to) are paid, which varies by state. This process is determined by which one of two categories your debt falls into: Secured or unsecured.

Secured debt (such as mortgages, car loans, etc.) is backed by assets, which are typically sold or repossessed to pay back the lender. With unsecured debt (credit cards, personal loans, medical bills and utilities), the lender does not have that protection, and these bills generally go unpaid if there is no money to cover them. But each kind of debt has its own set of rules, so let’s look at them each individually.

Medical Bills:

This is probably the most complicated debt to deal with, but in most states, medical bills take priority in the probate process. It’s important to note that if you received Medicaid any time from age 55 until your death, the state may come back for those payments or there may already be a lien on your house (meaning they’ll take a portion of the profits when the house is sold). Since medical debt is so complex and can vary depending on where you live, it’s best to consult an attorney on this one.

Credit Cards:

If there is a joint account holder associated with the credit card, that person is responsible for keeping up with the payments and any debt associated with the card. (This does not include authorized card users.) If no one else’s name is listed on the account, the estate is responsible for paying off the card debt. And if there is not enough money in the estate to cover the payments, then creditors will typically take a loss and write off the amount.

Mortgages:

Home co-owners or inheritors are responsible for the remaining mortgage, but they are only required to keep up the monthly payments and do not have to pay back the full mortgage all at once. They can also choose to sell the house to keep it from going into foreclosure.

Home Equity Loans:

Unlike a basic mortgage, if someone inherits a house that has a home equity loan, they can be forced to repay the loan immediately, which usually results in having to sell the house. But you don’t have to die for a home equity loan to backfire on you. Borrowing on your home beyond the initial mortgage is always a bad idea, so save your heirs the headache by avoiding home equity loans in the first place.

Car Loans:

As with other secured debt, your assets can be used to cover car loans, but the lender has the ability to repossess the car if there’s not enough money in the estate. Otherwise, whoever inherits the car can continue making the payments or sell it to cover the loan.

Student Loans:

Federal student loans are forgiven upon death. This also includes Parent PLUS Loans, which are discharged if either the parent or the student dies. Private student loans, on the other hand, are not forgiven and have to be covered by the deceased’s estate. But again, if there’s not enough in the estate to cover the student loans, they usually go unpaid.

Can Loved Ones Inherit Your Debt?

When the time comes, you want to pass down that priceless wedding ring or the family farmhouse—not your money problems. As we’ve seen, most debt is taken out of the deceased person’s estate. But there are several instances that can make someone legally responsible for your debt after you die. Let’s take a look at them:

The Dangers of Cosigning

To put it simply: You should never cosign. That’s because cosigning makes you liable for someone else’s debt. If you cosign for a friend’s loan or medical bills, you are agreeing to make the payments if that person is no longer able to. And if they die, then they definitely aren’t able to make the payments, which leaves you responsible for cleaning up the mess. Save yourself and your loved ones the financial stress—do not cosign for their loans and do not let them cosign for you.

Community Property States

“For richer or poorer” takes on a whole new meaning for married couples in the nine states with community property laws (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). In these states, the surviving spouse is legally responsible for any debt the deceased took on during their marriage (including private student loans), whether the spouse agreed to it or not. Pretty terrifying, right? All the more reason to work together as a couple to pay off your debt as soon as possible.

Filial Responsibility Laws

Almost 30 states have filial responsibility laws, meaning they require children to cover their deceased parents’ long-term care costs, such as nursing home or hospital bills. These are rarely enforced, but you don’t want to risk being unprepared if you find yourself in this situation.

Timeshares

This one may surprise you, but since most timeshare contracts include a “perpetuity clause,” the obligation to pay those ridiculous maintenance fees can pass on to your heirs. And while beneficiaries can refuse the timeshare, timeshare companies can still come knocking because it’s technically part of the deceased’s estate and is subject to probate. But timeshares are a waste of money in general, so it’s best to avoid the hassle altogether and get out while you still can.

What Can Creditors Take?

Not only does debt steal from you in the present, but it can also rob you of anything you were planning to pass down to your children or grandchildren.

Legally, creditors must be notified of a debtor’s passing by either their executor or family members. Creditors then have a specific time frame (usually 3–6 months after death, depending on the state) to submit a claim against the deceased’s estate.

Thankfully, there are a few things creditors can’t touch, including life insurance benefits, most retirement accounts, and the contents of living trusts. (This doesn’t apply if there are no living beneficiaries listed in the person’s will, though, so be sure to keep those updated!) But that beloved boat, prized coin collection or anything else that has value can easily end up being liquidated (sold for cash) to cover your debts if necessary.

And debt collectors aren’t much better than grave robbers. Even if you pass away, credit card companies still want their money, and they have no problem calling your grieving loved ones to try and get it. But unless they cosigned or are legally responsible for the amount owed, it is illegal for creditors to try to get money from a deceased person’s relatives. If you’re the family member getting these calls, you can tell those heartless creeps to buzz off! They do not have the power to demand you pay another person’s debt.

Why You Need Life Insurance

Even if your family isn’t officially liable for the debt you leave behind, having your estate eaten away by creditors can be just as traumatic. Do you really want your spouse or your kids to watch their home, cars and other possessions disappear while they’re in the middle of grieving your death?

That’s where life insurance comes in!

Because it’s exempt from creditors, life insurance basically guarantees that your spouse, children and whoever else you include as a beneficiary will get money after you die. As we’ve already mentioned, some debt after death can result in your estate being ransacked to pay it back. But life insurance acts as a shield between your family and the repo man, making sure they have enough to live on even after your assets get cleaned out by creditors.

And before you run scared and take out a whole life policy or consider credit life insurance, hold up! Term life insurance is the only way to go. It provides great coverage and ensures that your family receives a death benefit—plus, it’s a much more affordable option. If you’ve got people depending on your income, you need life insurance. No ifs, ands or buts about it! So do yourself and your loved ones a favor and get a policy today.

Debt Is Not a Death Sentence

All this talk of debt after death can be overwhelming. If you feel like you’re drowning in debt, you’re not alone. About 30% of American adults say they feel constantly stressed about their finances.² Debt does not help you, but it also does not define you. It may seem like there is no way out, but there is hope!

No matter how deep in debt you are, it’s never too late to get help and turn your life around. You can be debt-free and change your family tree!

If you feel burdened by money stress, our Ramsey financial coaches are here to help guide, encourage and equip you to make the best decisions for your situation. Find a coach near you to get a personalized plan for your money.

What Kind of Legacy Do You Want to Leave?

What if, instead of worrying about how your family would survive after you’re gone, you were able to rest in peace, knowing that they were well taken care of?

You want your loved ones to remember you for the blessing you were, not the burden you left behind. That’s why it’s important to think about your legacy, which includes proper planning and attacking debt.

Estate Planning

Half the battle of leaving a good legacy is making sure you legally prepare for what will happen with your finances after you die. Having a will makes the probate process so much easier on everyone involved, so go ahead and check that off your bucket list pronto.

Getting your affairs in order also means talking with your spouse and children about inheritance, and depending on the size of your estate, meeting with your lawyer. Yes, these kinds of conversations can be awkward and a little morbid, but they can save your family a lot of pain and stress later on.

Get Out of Debt

Ultimately, the best way to make sure your debt doesn’t affect your heirs is to not have any debt while you’re living. It’s tempting to postpone paying off your debt until you’re older, but as we know, debt often outlives the debtor.

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