As a young person with your whole life ahead of you, it’s easy to feel like you’re invincible. This type of thinking makes for a more positive outlook on life, but can also contribute to a raft of issues should something unexpected happen. No one wants to think about bad things happening–but if you don’t plan ahead, you could be leaving your loved ones with a mess of debt, unpaid bills, and belongings to sort through.
Learning more about this rather unpleasant topic can save you and your loved ones from having to deal with unnecessary stress on top of grief. Here’s what you need to know–just in case.
Broadly speaking, when a person dies and has unpaid debt, their money and/or assets will be used to pay the debt. This means that property and other belongings will be sold, turned into cash, and put toward the debt. In the event that there isn’t enough money to cover debts, things get a little harder to manage.
Here is a bit of information on what might happen, and what you can do now to prepare. These are general concepts that are heavily influenced by a number of factors. Local laws and individual situations may differ. We are not providing tax or legal advice and recommend consulting a professional if you want help with your specific situation.
Federal student loans
You might’ve heard that student debt is forgiven when you die. This is true for federal student loans, however, the same cannot necessarily be said for private student loans. Some private student loan lenders like Sallie Mae, Discover, Wells Fargo, and New York’s Higher Education Services Corporation offer a “death discharge,” or loan forgiveness, if the borrower dies. However, most private lenders do not.
Private student loans
Where your private student loans go after you die depends on if your name is the only name on the loans or not. If your name is the only name assigned to those debts and you pass away, then your family won’t be legally obligated to pay your student loans.
However, if there is a co-signer attached to your debt—as there often is with student loans—then the co-signer will be responsible for paying off the debt immediately after you pass. The reverse is also true: If the co-signer of your loans passes away, it’s possible that you will have to pay off the remaining balance of your loans immediately. When either the borrower or the co-signer dies, it’s likely the loan will go into default, requiring the remaining person to pay the rest of the loan in full.
If you’re married
If you took out student loans after you got married, your spouse might be responsible for paying your student loan debt if you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. These states are called “community property states” and have their own set of rules regarding marriage and joint debt.
What you can do:
- If you have only federal student loans, you’re in the clear.
- If you have a co-signer on a private loan, you might want to consider a co-signer release for both of your sakes. That way, if one of you dies, the student loan will not go into default, and neither of you will be responsible for paying it off immediately.
- If you are married, took out a student loan after your marriage began, and live in one of the community property states, you can look into a post-nuptial agreement to keep your student loans from being joint debt.
Credit card debt
Like with other kinds of debt, credit card companies will bill your estate to cover your debt, meaning they will sell your stuff and use the cash to pay it off. However, credit card debt takes a back seat to mortgages and auto loans, which will be paid off first. Mortgages can be paid off by selling the house, and auto loans can be paid off by selling the car, but credit card debt is not backed by an asset. Therefore, if all of your things are sold off to pay for your mortgage and auto loan first, nothing will be left to pay off your credit card debt.
Debt: the worst kind of inheritance
If a family member is a joint cardholder on your credit card, meaning they co-signed for the card, that family member will be responsible for the remaining credit card debt after you die. Likewise, if you have a spouse and live in a community property state, your spouse may be liable for debt created during your marriage.
What you can do:
- Make sure you don’t have a co-signer on your credit card to ensure your family members are in the clear.
- If you live in a community property state, couples can sign an agreement with each other to have their debts and income treated separately.
If you pass away with an auto loan, there are a few different things that can happen. Your family could decide to keep the car and continue paying off the loan, or they could surrender the car if they couldn’t afford it or decided that they didn’t need it.
If the car is surrendered, it will be sold in order to pay off the auto loan. If, however, the balance of the auto loan is more than the car is sold for, it’s likely that the estate will be billed. If the estate is billed, that means that the deceased’s things will be sold for cash to pay the remainder of the auto loan balance.
What you can do:
-If your family wants to keep the car but is unable to make payments, term life insurance or credit life disability insurance is available. The latter will pay off your auto loan at your time of death, and your family will get to keep the car.
Mortgages and other debt
If you have a house and other debts to be paid when you pass away, some states require the house be sold in order to pay off those debts. Whether the mortgage has been paid off in full or not, your house is at risk for being sold if you have other outstanding debt that needs to be taken care of. If an heir of yours wanted to keep the house in this scenario, they would have to pay off your other debts so that the house isn’t sold, even if your heir is not directly responsible for those debts in any way.
Transferring your mortgage
While normally transferring home ownership requires that you pay off the mortgage immediately and in full, transferring home ownership due to a death is different. If the house isn’t sold to pay off other debts, then an heir can take over the mortgage, assuming they are able to make the monthly payments. Even better, the person taking over the mortgage can refinance the mortgage to try to lower monthly payments or get a lower interest rate.
If the heir taking over the mortgage is unable to make payments, best-case scenario is that they can sell the house; the worst-case scenario is for the heir to walk away if there’s more owed on the mortgage than the home is worth.
If a reverse mortgage was taken out on the home before the death of the homeowner, that’s a different story. Taking out a reverse mortgage is basically borrowing money that you would have made if you had sold your house. In this case, the heirs would only get the house if the reverse mortgage balance could be paid off by selling the deceased’s assets, with cash from the heirs’ pockets, or by taking out a new loan. What’s more likely to happen is that the house will be sold, the reverse mortgage will be paid off with money from the sale, and the heirs will get any money left over.
What you can do:
- If you have a mortgage and want to pass the house along without the instant burden of monthly payments, you can get life insurance to help cover the cost. Regular term life insurance is recommended over mortgage protection life insurance because it’s more flexible, it costs less, and your heirs decide how to best spend the money left to them.
Dogs, cats, and other pets
What will happen to your furry family member when you die? If no friends or family members are able to take care of your pet after you die, it’s likely your pet will go to a shelter, and possibly be put down. Many pets in this scenario become despondent after having their worlds turned upside down.
What you can do:
- Find a first and second alternate owner in the case that you pass away before your pet does, and make sure they agree to take your pet. While an informal agreement works often, you can guarantee your pet’s future if you put it in your will or make a pet trust.
- It’s common to leave the alternate owner some money along with your pet in the case of your death, and to have a packet of your pet’s medical history and daily needs ready.
Talking about death is always uncomfortable, but it’s one of few things in life that are truly inevitable. There’s nothing worse than grieving a loved one and having to make sense of their financial lives at the same time. Make it easy on your loved ones by planning ahead, and communicating your plans to them. If your parents are living, ask them if they have done their end-of-life planning, and if possible, ask them to gather any information you’d need to know in the event that they passed unexpectedly.
If you or a loved one are in the process of planning for end of life finances, we recommend consulting with a professional about your specific situation.
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