What happens to your debt when you die?

Community Property Laws

Oftentimes families have not choice but to hold a sale or auction to sell off property from a deceased's estate to help pay expenses.
Oftentimes families have not choice but to hold a sale or auction to sell off property from a deceased's estate to help pay expenses.

Now that we understand the probate process and the fact that many intricacies are state-defined, it's time to dive into some of the exceptions to the rule. As we discussed, loans that are cosigned are the responsibility of both parties, while debt in your name alone cannot be passed on to your surviving family. This is the case most of the time, but not in Alaska, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin [source: Pond]. These states wanted to be different, so they all passed laws stating any property acquired during a marriage, whether in one spouse's name or both, is common property. This gets a bit messy when settling a divorce, but that's another day's question. In regards to settling an estate, common property laws simply assert that your debt, if acquired during marriage, will be passed on to your spouse after your death. If that doesn't sound like something you want to deal with, there are 41 other states you might want to consider moving to.

Another exception lies in debts associated with physical property. If you bequeath your home to your son, the debt you still owe on the mortgage will be given to him with the property. This is true for all property, including cars, boats and jewelry. The good news is this exception only exists if the property is worth more than the debt owed. If you are upside down on your home mortgage and owe more than the property is worth, this debt will be settled by your estate or forgiven by the bank depending on how much is left in the estate. So, even though a family member assumes your debt after your death, they really assume possession of a piece of property. If the family member cannot afford the loan payments, he or she may sell the property and keep the difference in monetary value.

Finally, let's talk beneficiaries. If you hold a life insurance policy, pension plan, 401k, or the like, you're probably familiar with this word. These plans require that you name a beneficiary, or a person to whom the value of the plan is given upon your death. Many people purchase life insurance policies to assure their families are taken care of financially when they die. Ready for a deep sigh of relief? This money is not considered part of the estate, and thus cannot and will not be used to pay off your debts after death. Phew! All in all, debt after death is a pretty reasonable process. Just don't forget to plan for it by investigating the intricacies of your state's laws.

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