Most Americans Expect to Die With Debt. Who Inherits It?

Two of the toughest topics to discuss with loved ones are death and money. A new survey shows just how far we'll go to avoid talking about these uncomfortable issues, and the consequences that can follow.

Some 55% of Americans say they expect to pass on debt to a loved one when they die, according to a recent survey from Debt.com. In 74% of cases, the amount of debt they expect to leave behind is at least $5,000.

“Most Americans don’t know which debts they inherit and which they don’t,” Don Silvestri, president of Debt.com, said in a statement. “The topic isn’t confusing; it’s just uncomfortable. So many of us avoid it entirely.”

As a result, survivors can be left with unanswered questions. Here, we'll answer the most pressing: What happens to your debts when you die? And who gets stuck paying them off?

Which debts can be inherited?

In most cases when a loved one dies, you won’t be liable for their unpaid debts — but there are some exceptions, especially if you're a spouse or have shared accounts with your deceased relative.

State laws can play a big role. (More on this below.) But generally speaking, when someone dies, their debts are paid by their estate; that is, the money, property and other assets they owned when they died.

According to the Consumer Financial Protection Bureau, or CFPB, if the value of the estate isn't enough to pay off the person's debts, the lender is typically out of luck. A person's debts effectively die with them.

But there are some debts that can be inherited, and some situations that require debts to be repaid, even after death. Here’s a look at the debts most likely to be passed on.

Co-signed loans

Just about any type of loan can be co-signed: auto loans, personal loans and more. When two people co-sign a loan, they are both equally responsible for the debt. So if one of the signatories dies before the debt is paid off, the other has to make the remaining payments.

One common example is private student loans. These loans are almost always co-signed by the parent of the student borrower. If the borrower dies, the parent could be liable for the remaining debt.

While some lenders of private student loans have policies that forgive the remaining balance if the borrower dies, they are under no obligation to offer this. Federal student loans, on the other hand, are always discharged if the borrower dies.

Jointly-owned credit cards

If you have a joint credit card with someone who dies, you'll inherit the responsibility for paying off the outstanding balance on that card. The rules are different, though, if you're just an authorized user of a card and the primary cardholder dies. In that case, you will need to stop using the card immediately, but you won't be responsible for paying off the balance that accrued before they died.

Inherited property

If you inherit a car or a house that hasn't been paid off, you are responsible for continuing payments on the loan(s).

Houses can be foreclosed on and cars can be repossessed by lenders if the owner dies and the estate or family members don't pay them off.

Usually, inheritances such as these are spelled out in a will, meaning the debt doesn't simply pass to a surviving family member unexpectedly. If there is no will, the property will divided up in court and distributed to family members after the estate's debts have been settled. In some cases, the property might need to be sold to cover the estate's debt.

Community property debt held by a spouse

According to the CFPB, you are generally not responsible for your spouse's debts if they die.

Here are some exceptions to that rule of thumb. Aside from co-signed loans and jointly-owned accounts mentioned above, surviving spouses might end up liable for so-called “community property” debt.

In states that have community property rules, debts that are incurred during the marriage are generally both people's responsibility by default. So if one spouse dies, creditors will try to collect from the surviving spouse. According to the insurance firm MetLife, nine states have community property rules: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

If you live in one of these states and do not have a prenuptial agreement that addresses how property, assets and debts are split up, you could end up responsible for all the debts incurred during the marriage, regardless of which spouse took out the initial loan.

Dealing with the death of a loved one can be devastating on its own. Inheriting debt on top of that only makes matters worse. If you're unsure of what you owe creditors after the death of a loved one, consult a lawyer with expertise in estate planning to help you navigate debt obligations.

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