Only one kind of debt completely disappears when you die, but depending on their relationship to you, your heirs may not have to pay off the rest of the debt.
Cosigners and joint account holders on any loan or debt you carry will be responsible for that debt when you die. And in community property states, your legal spouse will be responsible for almost all debt when you die (check out these clever ways to pay off debt).
Here are the common types of debt that your heirs may or may not have to pay after your passing.
Federal student loans are the only debt that disappears when you die. Parent PLUS loans are also forgiven upon the death of the parent or the child the loan served, even if the child has heirs to their estate.
Private student loans follow different rules and may or may not be discharged when you die. The lender may try to collect from your estate. If you have a cosigner for your private school loan, they will be responsible for paying back the loan when you die.
Tax debt doesn’t disappear when you die, and your estate must pay the IRS whatever you owe. The executor of your estate will have to file a tax return for your estate in the year of your death on any income for that year, including investment interest, retirement accounts, and Social Security payments.
However, if your estate doesn’t have enough money to pay your tax debt, the IRS cannot collect from your heirs personally and will discharge the debt.
Medical debt does not disappear when you die unless the amount of debt is minimal and the claimant writes it off rather than spends the money and time to try and claim it from your estate.
In most cases, however, medical debt will be claimed from your estate. If there is not enough money in your estate to cover the unpaid medical bills, and no one is personally responsible for your medical debt, the debt is written off.
Medicare may attempt to collect medical payments made while you were alive from your estate, but there are rules limiting situations in which Medicare can collect from your estate.
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Credit card debt
Credit card companies can claim unpaid balances or other debt from your estate when you die. Credit card debt is unsecured, which means there is nothing to repossess if the debt is not paid. If it is a joint credit card, the co-owner will be responsible for the balance and debt on the card, even if the card was closed before your death.
Authorized card users who are not joint co-owners of the card are not responsible for any debt on the card. However, the company will claim the debt from your estate if you are the sole owner of the credit card. If there aren’t enough funds in your estate to cover the debt, it is written off.
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Small business loans
If you are the sole owner of your business, depending on the structure of your small business, your estate may be responsible for loans taken out for your business. If another person owns the company, they may also be responsible for the loan.
Loans from the Small Business Association (SBA) can be forgiven by having the person authorized to settle your estate fill out paperwork requesting forgiveness.
When you die, the mortgage on your house needs to be paid by your estate or by anyone who co-signed the mortgage. If the estate can’t pay the total balance, the executor of your estate may have to sell the house and use the proceeds to pay off the mortgage.
When your mortgage passes to your heir, your lender may request that the mortgage be paid off immediately. If your heirs want to take over the mortgage, the lender may require them to prove that they can repay the debt.
Alternatively, you can take out a mortgage protection insurance policy to ensure your mortgage is paid off after your passing.
If a home equity line of credit (HELOC) exists but there is no debt and you were the only owner, your line of credit will be closed. A joint owner of the HELOC may be required to prove that they can repay any money borrowed to keep the line of credit open.
Any debt owed through the HELOC will be claimed from your estate and any mortgage on the property. If a HELOC has a co-owner, they are responsible for the debt.
If you have an outstanding balance on your auto loan when you die and are the only signer, the loan will get paid from your estate. If there is not enough money in your estate to cover the loan balance, the lender could repossess your car.
Regardless of the car's registered owner, the vehicle can be repossessed if the loan is not paid. If you leave the car to someone, they may have to refinance the loan to be able to make the payments to keep the vehicle.
Pro tip: If you're buried in car loan debt and looking for ways to reduce your car expenses, consider shopping around for a new auto insurance policy to help bring costs down.
Child support payments are not forgiven when you die and will be claimed from your estate. If you have a partner or spouse, some states may consider your partner responsible for continuing to make your child support payments.
If you think your estate won’t be able to pay your child support obligations, you can take out a life insurance policy to help cover child support. Estate planning is crucial when you are supporting children and need to continue to support them.
Previously called alimony, spousal support payments terminate when you die. However, depending on the state and the support agreement, the spouse formerly receiving payments may claim the remaining amount due from your estate or through any life insurance policies you have.
Federal student loans are the only debt that truly vanishes when you pass away. All other debt may be required to be repaid by a co-owner, cosigner, spouse, or your estate.
If you would like to lessen the impact of this debt on your spouse or estate, consult with a financial planner to determine which debt to pay down first or how to pay off your debt entirely.
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