We all hope to pass on something to our loved ones when we leave this world, but debt isn’t usually what we have in mind. When making out a will, it’s a question many of us will ask while sitting down with our lawyers, “What happens to my debt when I die?” The answer depends on various factors, such as what sort of debt do you have (credit cards, mortgage, ect.), what state do you live in and does your debt have a cosigner?
Secured and unsecured loans
The promissory note on a mortgage is handled differently than credit card balances. The mortgage loan is secured because it uses the property itself as collateral. Usually, the living spouse is a co-signer on the loan and therefore left in charge of the estate. These circumstances leave the spouse fully liable for the remaining mortgage balance. He or she will have to assume payments or sell the property in order to satisfy the debt. The majority of credit cards, on the other hand, are unsecured. In most instances, if the deceased is the only name on the credit card account, the debt may be paid through the estate, but if not, the surviving spouse isn’t liable for payment. In these cases, the debt is written off by the credit card company. A write off simply means the company will report the bad debt to the IRS claiming it as a loss in order to receive a tax break on their profits.
Community property states
If you live in a community property state, your spouse might not be so lucky as to have the credit card debt charged off. A community property state regards all assets and the debt that goes along with them as being equally owned by married partners. This includes any loans the deceased might have cosigned for another party. Cosigners, even in death, are considered equally responsible for the debt to which they have guaranteed payment in the event that the primary borrower defaults. The ten community property states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In these states, a spouse is subject to collection action for any and all credit card debt of the deceased spouse. Should the deceased have had a cosigner, the lender has the choice of collecting from either the spouse or the cosigner.
Protecting your family
There are measures you can take to ensure financial security for your spouse and children in the event of your death. One is to be sure you have sufficient life insurance, enough coverage to pay off any remaining debt while still leaving your spouse with a comfortable nest egg. Be sure to have a will so that funds and assets won’t get held up in probate court. It is always wise to be conservative when it comes to the accumulation of debt. Remember, it might not be only your life which will be impacted