Who Will Inherit Your Debt?



And Whose Debt Will You Inherit?

Most of us would love to be able to leave a nice inheritance to our spouse, kids, grandkids or other loved ones. However, many baby boomers who have seen their net worth dip below zero in recent years will instead leave a very different kind of legacy: DEBT.

Who will inherit your debt if you died tomorrow?

Credit Card Debt

Your spouse may inherit your credit card debt if he or she was a joint account holder, or if you live in a community property state where debt incurred after the marriage is considered community property. Your children or other relatives, however, will generally NOT be personally responsible for that debt unless they co-signed the loan. But keep in mind that credit card debt may have to be paid out of any assets in your estate, if you leave one. (More on that in a moment.)

Mortgage Debt

Since most mortgages are jointly held by married couples, it’s often likely that your spouse will have to continue to pay the mortgage if they want to stay in the home. Other heirs who live in the home may be able to do so as well. The Consumer Financial Protection Bureau has implemented rules to assist surviving family members when a lone borrower dies to protect them from having the loan balance “accelerated” — or due immediately upon the borrower’s death.

Still, if heirs or family members want to keep the home, they will have to be able to afford to do so. And that means they either have to continue making the mortgage payments or refinance the loan into something more affordable. A loan modification is also a possibility, but can be difficult to obtain. Here’s more information about what happens to a mortgage when a borrower dies.

Student Loans

Federal student loans can be canceled upon the death of the borrower. In addition, federal loans typically do not require a co-signer, so there shouldn’t be an issue there. Parent PLUS loans are also typically canceled upon the borrower’s death. However, private student loans are not always canceled upon the borrower’s death, and they usually do require a co-signer, which means a parent, spouse or other co-signer may be held responsible for the loan if the student borrower dies before it is repaid. In fact, some lenders or servicers will accelerate the payment upon the borrower’s death, meaning they expect the balance to be paid immediately. This guide explains what happens to student loan debt after death.

Auto Loans

If you don’t own your vehicle free and clear, your auto loan debt could create problems for your loved ones. Again, if there is a co-signer on the vehicle loan, that person will automatically be responsible for the balance. And spouses in community property states may be responsible for the debt as well.

But what if there is no co-signer or spouse who is liable for the debt? Heirs may have a couple of options. One would be for a family member, such as a child, for example, to purchase the vehicle and pay off the debt. Another would be to contact the lender to find out whether it is possible to assume the payments. And the other option would be to return the vehicle to the lender. The lender will then sell it, but if the price they get is less than what is owed, the lender may try to collect the balance from the estate (if there is one).

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