If you have a lot of debt, you might wonder what would happen when you die. Would a family member be required to pay your debt? Does it become their responsibility?

Fortunately, the answer is ‘no.’ A family member doesn’t inherit your debt, but the debt doesn’t just disappear either. Here’s what you must know.

Your Estate and Paying your Debt

While a family member won’t inherit your outstanding debt, your estate will. Your estate is a combination of all the assets you own. Once an inventory of your assets is made and the values totaled, the executor of your estate will pay off the debts you have from the estate.

Any outstanding debts are paid first, then any requested gifts are made. For example, if your estate is worth $500,000 and your debts are $300,000, that leaves just $200,000 to distribute. If you had over $200,000 in gifts outlined in your final wishes, the money will be disbursed according to the percentages you originally outlined.

For example, if you had two beneficiaries receiving funds, whatever was left after paying your debts would be split 50/50. Even if your beneficiaries receive less than you intended, they’ll still receive the same percentage you intended.

Exceptions to the Debt Rule

If you have joint accounts and the other party survives you, the outstanding debt becomes their responsibility and not the responsibility of your estate. For example, if you have a loan with your spouse and you die, your spouse will still pay the loan. It won’t reduce the amount of your estate and how much is distributed to your beneficiaries as outlined in your final wishes.

Handling a Mortgage after you Die

If your home still has a mortgage on it when you die, the mortgage stays with the home. Whoever you left the home to in your will, can decide what to do with the home. Most people have two options:

• Sell the home – The person that inherits your home can sell it, using the proceeds from the sale to pay off the mortgage. The lender gets paid first before the person selling it, just like would happen if you sold the house while you were alive.

• Assume the mortgage – If your beneficiary wants to keep the home, he/she can apply to assume the mortgage. This means they take over where you left off on the loan and become the new owner of the home and the new name on record with the lender.

What Debts are Paid First?

When a person dies, it may feel like everyone has their hand out and in most cases this is true including the beneficiaries. Fortunately, there is an order that business must be conducted in order to handle the funds appropriately.

Before any debts are handled, funeral expenses are covered. This is a priority to ensure the deceased’s final wishes are granted. Next, any administrative fees are paid, such as paying a lawyer or accountant to handle the estate.

Next comes the debt. While there isn’t a specific order, typically secured debts get paid first (car loans, mortgages, etc.)  then unsecured debts are paid with whatever is left. If there aren’t enough funds left to pay beneficiaries, then there aren’t any funds distributed to them.

Will a Family Member ever Have to Pay Debts from their Funds?

The good news is your family members will never be responsible for paying your outstanding debts from their funds. If the executor exhausted the estate, the remaining debts are forgiven. You don’t have to worry about a family member taking on your debt.

Even if creditors try to get family members to pay, they are under no obligation to do so.

4 Ways to Ensure your Family Members don’t Inherit your Debt

Don’t Have a Cosigner

If you take on debt, take it on yourself. If you cosign with someone, that person becomes responsible for the debt if you die. Instead, only take out the loans you qualify for and can afford to pay off.

Take out a Term Life Insurance Policy

A term life insurance policy pays your beneficiaries upon your death. If you know how much debt you have and are concerned about leaving your loved ones with the burden, the term life insurance proceeds can cover it.

Take out a policy that covers the total amount of debt and instruct your loved ones on what to do with the funds. For example, if you have a $100,000 mortgage, you can take out a $100,000 term life insurance policy for the term that’s left on the mortgage. This way you know that if you die before then, your life insurance will pay off the mortgage.

Tell your Loved Ones to Send Creditors your Death Certificate

If you have outstanding debts upon your death and your loved ones can’t cover it with your estate, have them send your death certificate to your creditors. That immediately takes any burden of payment off anyone else. If the estate has been exhausted, creditors must purge the debt.

Set Aside Money to Pay your Debts

If you’d rather not pay for an insurance policy, save money yourself each month to cover your debts should you die. While you’re alive, it could serve as an emergency fund, but in the event of your death, the money will be there for your loved ones to pay off your debts.

Final Thoughts

Family members don’t inherit your outstanding debt, but it might still need to be satisfied depending on the value of your estate. A lot of the pressure goes to the executor of your estate, but there isn’t a financial liability placed on anyone except your estate.

Your loved ones should consult with an attorney before succumbing to any pressure from creditors claiming that they owe the money. Any debts your estate can satisfy is required, but beyond that, the debts are erased unless there is a surviving co-signer on the loan. Contact Us today our debt expert are here to help you get rid of debt.