Who Pays Your Loans and Credit Card Debts at Your Death

2006-05-17

Many people think that when they die their debt dies with them. This couldn't be further from the truth. Any outstanding loans and credit card debt you have at death goes against your estate. And whom ever you have appointed as your executor will have to make difficult choices on how to payoff the debts after death.

If you have a positive net worth, meaning there is money or assets available after all your debts are paid off, your heirs will recieve it in the form of an inheritance. Now if you have a negative net worth, meaning once all your assets are sold you still have bills outstanding, you can not be held liable for those debts. That still doesn't mean the creditors can't try to collect the outstanding debt. If someone signed on with you as a co-signer - or joint account - the creditors can go after the surviving account holder for payment.

For instance, if you and your spouse signed a car loan or have joint credit card debt and you were to pass away, your spouse can still be held liable for the payoff. Now if the loss of your income adversely affects your spouse this could place them in a financial hardship. Your spouse or children can not be held liable for outstanding debts they are not contractionly obligated to pay, no matter what a creditor tries to tell you. But this only comes into play once all the assets that are in the deceased persons name has been liquidated.

Now many people don't like to think about this, but it is a reality so we will mention it here. Burial expenses continue to rise and can easily cost between $10,000 - $15,000 and are raising at a rate of 3-5% a year.

Our recommendation for anyone with loans and credit card debt - get an appropriate amount of life insurance to cover these debts. By doing so, you are protecting the assets you've worked your life to achieve and pass on to your heirs. Life insurance is paid to the beneficiary tax-free. You can even plan to have enough funds available to pay any estate taxes that may be owed.

Our Life Insurance Needs Calculator can help you determine how much life insurance you need to cover your debts, burial, and anyother items you want covered at death.

Remember like anything else, things are going to change over time. A 30 year old with 2 small children may need $250,000 or more in life insurance to cover all their debts. While a 60 year old retired individual with little to no debt may need $10,000 - $20,000 to meet their needs. Make it a habit every couple of years to reevaluate your debt situation to be sure you have things in order.

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