Who can inherit your debt when you die?

Dec 16, 2020 | Estate Planning

If you pass away with debt to your name, most liabilities should become the responsibility of your estate. Your estate refers to everything you own at the time of your death.

The executor of your estate — which is the person you or the courts appoint to manage and distribute your assets after you die — must use your assets to repay what you owe. This could mean a number of things, from taking money directly from your bank accounts to selling property. In most situations, if your estate does not have enough to cover your debts, creditors are out of luck. However, in select scenarios, your loved ones may inherit your obligations. NerdWallet explains the types of inheritable debt as well as who may become liable.

What types of debt can you pass on?

Some types of debt are more likely to stick around after you pass away than others. Liabilities that most commonly go to heirs are as follows:

  • Student Loans: Some private lenders will forgive student loans upon death, and the U.S. government discharges all student loans when a person dies. However, if you have an outstanding private student loan that you took out before November 20, 2018, your spouse or co-signer may assume legal obligation of it.
  • Mortgage Loans: Mortgage and home equity loans become the property of your estate upon your death. However, if you pass your home onto an heir, or if an heir assumes ownership, the outstanding amount will become his or her obligation. Your executor may choose to remove the burden of debt by selling your home and using the proceeds to repay the mortgage loan. If you cosigned the loan with someone and that someone outlives you, he or she assumes sole responsibility of the debt.
  • Vehicle Loans: Auto loans are secured, which means failure to make payments can result in repossession. If your estate cannot repay your auto loan, and if an heir wants to keep your vehicle, he or she must continue to make payments to avoid repossession.
  • Credit Card Debts: An heir only becomes responsible for outstanding credit card debt if he or she is a joint account holder. Authorized users do not assume liability.

Who can inherit your debt?

Select few individuals can inherit your debt upon your death. In all states, co-signers and joint account holders assume full responsibility of a deceased’s remaining debt. In community property states, spouses stand to inherit debt. Fortunately, New Jersey is not a community property state. If your estate executor fails to comply with probate laws, the state may hold him or her accountable for debt that remains unsettled.