This Is What Happens to Your Debt When You Die

We asked an expert to explain where all that debt really goes when you pass away—and how to handle it beforehand.

Close-up view of banknotes. Shallow DOFAlex Staroseltsev/Shutterstock

Credit cards, a car loan, a mortgage—whatever debt you're carrying around doesn't just disappear when you die. Instead, your executor will pay it off using your assets, which means that unpaid debt can eat into what you've left behind for your heirs, explains Stefanie O'Connell, personal finance expert and author. She warns that "in some cases, your family members could even wind up on the hook for your debt."

And not all debt is created equal. In the case of secured debt, like mortgages or auto loans, O'Connell says, "Your estate can either pay off your debts in full or continue making installment payments, or the property can be sold or turned over to the lender to satisfy the debt." On the other hand, unsecured debt, like credit cards, bills, or personal loans, is typically just paid from the estate (which is everything you own, including assets, bank accounts, real estate, etc.).

Student loans are the exception, with a few caveats: The majority of federal student loans, along with private loans without a cosigner, are discharged with proof of death, meaning your heirs won't be responsible for them. However, if your private student loan was cosigned, that person will have to pay it off. And some loans, like PLUS loans, although technically forgiven, could leave the parent who took it out with higher taxes.

So how can you protect both yourself and your family? First, O'Connell recommends meeting with an estate planning expert to get your affairs in order. "Creating a plan of action for your outstanding debt is an important part of the estate planning process, as well as other end-of-life plans, like medical directives, wills, and trusts you might want to use to manage your assets when you pass away."

She also suggests reviewing your life insurance policy to make it's up-to-date. And don't forget to designate beneficiaries. "If your beneficiaries are assigned properly, some of your assets may bypass probate and be shielded from creditors," O'Connell notes. That means that anyone listed on your policy won't be forced to give up their money for your debt. Feeling overwhelmed by how much you owe now? Read how this couple paid off $78,000 in less than two years.

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