Typically when someone dies, their personal debt does not get passed on to surviving family members. If you find yourself up to your eyeballs in debt and unable to pay your home mortgage, the foreclosure process allows you to walk away. Even if you owe more than your home is worth, the bank takes your house and forgives the remaining debt, leaving you with a terrible credit score. But what happens when you die? Do the banks and creditors you still owe money forgive your debt or do you bequeath your debt to your surviving family along with your precious heirlooms?
The cut and dry answer is this: Your debt belongs to you and you alone; it is not passed on to your family members when you die. The full and complete answer is something only an estate planning expert with knowledge of your state's laws can answer. The laws regarding debt after death are defined at a state level, so there's really no umbrella answer for everyone. In most cases, the only instance in which another family member would be responsible for your debt is if they cosigned a loan with you. By cosigning, both parties assume full responsibility for the loan. If one person cannot pay (for a number of reasons including, but not limited to, death), the other person carries the remainder of the debt alone. In very rare cases, states abide by community property laws. But this muddies the waters and confuses our cut-and-dry answer. So, we'll come back to this later.
First things, first. As your estate is settled after death, any remaining debts you owe are paid out from the value of your estate. If your estate doesn't have enough value to cover all of your debts, they will be paid out at equal percentages until the estate money runs out. All remaining debt will be forgiven. Sounds like a pretty good deal, doesn't it? Well, not so fast. Remember that prized family heirloom that has been passed down for generations? Well, Pappy's pocket watch doesn't just have sentimental value; it has monetary value that is considered part of the estate. Worried about whether or not your family heirlooms may be lost to an outstanding bank loan? Read on to the next page to learn more about the intricacies of settling an estate (known as the probate process) and the few commonalities that do exist.