When you die, you can no longer continue paying your creditors. Unfortunately, your debt doesn't die when you do. Your creditors will work to recover your unpaid debts after your death by filing payment claims against your estate. Depending on the type of debts you left behind and the laws in your state, your loved ones may be financially responsible for paying off your creditors after your death.
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Debts you leave unpaid do not generally become your children's responsibility after your death. Although it is not uncommon for creditors to demand payment from family members after a debtor's death, your children have no legal obligation to repay your creditors. The exception to this rule occurs if you and your child shared a joint debt, such as a joint credit account, or your child co-signed with you for a loan. In each of these cases the debt belongs to both you and your child and, upon your death, your child becomes solely responsible for repaying that debt.
Creditors you owe have the right to file payment claims with the probate court responsible for distributing your estate. The executor of your will must use the estate's proceeds to pay as much of your outstanding debt as as your assets will allow. Your heirs receive any funds left over after the executor pays off your creditors. If you do not have a will, a personal representative serves the same purpose as an executor and distributes the proceeds of your estate accordingly. Although your children are not generally responsible for your debts, creditor claims reduce the amount of inheritance each child receives from your estate.
Like your children, your surviving spouse does not directly inherit your unpaid debts, but she may be liable for them just the same. Spouses often share joint accounts, such as a joint mortgage or credit card account. Whenever two people share a joint debt, both are equally responsible for payment. That responsibility does not change when one spouse dies. Thus, any joint accounts you share with your spouse become your spouse's full financial obligation should you die before paying off the debt
Community Property States
One factor that influences whether your debt passes on to a loved one is whether you live in a state that recognizes community property law. If you live in a community property state, such as California, you and your spouse share all of your debts and assets equally – regardless of which of you actually acquired the asset or incurred the debt. In community property states, your spouse is liable for your debts after you die. This is true even if those debts were not part of a joint account. An exception to the community property rule exists for any debts you acquired prior to your marriage. Because you did not incur these debts during your marriage, they do not fall under community property laws and your spouse is not legally responsible for their payment.
References & Resources
- The New York Times: You're Dead? That Won't Stop the Debt Collector
- Bankrate.com: At Death, Who Inherits Credit Card Debt?
- Fox Business: Dying With Debt – Will Your Children Inherit Your Obligations?
- Clearpoint Credit Counseling Solutions: Debt After Death of a Spouse
- The Judicial Branch of California: Property and Debt
- AARP: Debts After Death
- SmartAboutMoney: Planning for Death – Make Your Wishes Known
- CNN Money: Debt After Death – Banks Chase Down Mourners
- Stockbyte/Stockbyte/Getty Images