What Happens to Your Debt When You Die?

Debt doesn’t typically die when we do.

A number of factors dictate what happens to debt when you die, including whether anyone co-signed on the loan, if the debtor had assets at death and what type of debt they held. The laws also vary from state to state.

Generally speaking, debts must be paid off by your estate when you die — if you have any assets. (We’ll get into co-signers, spouses and joint accounts a little later.)

For example: If you die with $100,000 cash in the bank, and $10,000 in credit card debt, that debt must be paid off before anyone receives an inheritance — creditors are first in line for a dead person’s assets.

“Your executor or administrator — the person in charge of your estate — will pay off those debts with the assets left behind before your family receives anything,” said Carmen Rosasa California-based estate attorney.

“Paying those debts could mean simply writing a check from a bank account or selling assets for money to make those repayments,” she said. Assets can include the person’s home, cars or other valuable items.

The executor of your estate should notify creditors, credit reporting agencies and banks of your death as soon as possible. By notifying these agencies early, there’s a better chance your family will prevent someone from stealing your identity for financial gain.

Your executor can also request a copy of your credit report, which will tell them exactly what debts you had.

Creditors want — and expect — to be paid by your estate. They may make a legal claim in probate court, which is the legal process that oversees the handling of your estate.

Because it can take a while for your financial affairs to be sorted out, creditors may agree to a settlement with your estate for less than the total amount of debt.

“They’d rather have 40 or 50% now than to have to deal with all the hassle and uncertainty of waiting,” said John O’Gradya San Francisco-based estate lawyer….