Only one type of debt disappears completely when you die, but depending on their relationship to you, your heirs may not have to pay the rest of the debt.
Co-signers and joint account holders on any loan or debt you carry will be responsible for that debt upon your death. And in community property states, your legal spouse will be responsible for almost all debts when you die (check out these smart ways to pay off debt).
Here are the common types of debts your heirs may or may not have to pay after your death.
1. Student loans
Federal student loans are the only debt that disappears when you die. Parent PLUS loans are also canceled upon the death of the parent or child the loan served. This is true even if the child has heirs to his estate.
Private student loans follow different sets of rules and may or may not be discharged upon your death. The lender may try to collect from your estate. If you have a co-signer for your private school loan, they will be responsible for repaying the loan upon your death.
2. Tax debt
The tax debt does not disappear when you die, and your estate will have to pay the IRS whatever you owe. In fact, your estate’s executor will need to file a tax return for your estate in the year of your death on any income from that year, including investment interest, retirement accounts, and Social Security payments. .
However, if your estate does not have enough money to pay your tax debt, the IRS cannot personally collect your heirs and will discharge the debt.
3. Medical debt
Medical debt does not disappear when you die unless the amount of the debt is very small and the plaintiff cancels it rather than spending the money and time trying to claim it from your estate.
In most cases, however, the medical debt will be claimed from your estate. If there is not enough money in your estate to cover unpaid medical bills and no one is personally responsible for your medical debt, the debt is written off.
Medicare can attempt to collect medical payments made during your lifetime from your estate, but there are rules limiting when Medicare can collect from your estate.
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4. Credit card debt
Credit card companies may claim outstanding balances or other debts from your estate upon your death. Credit card debt is unsecured, which means there is nothing to take back if the debt is not paid. If the credit card is a joint card, the co-owner will be responsible for the balance and debt on the card, even if the card was closed before your death.
Authorized Card Users who are not co-owners of the Card are not responsible for any debt on the Card. If you are the sole owner of the credit card, the company will claim the debt from your estate. If there are not enough funds in your estate to cover the debt, the debt is written off.
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5. Small Business Loans
If you are the sole owner of your business, depending on your small business structure, your estate may be responsible for borrowings taken out for your business. If the business is owned by one or more other people, they may also be responsible for the loan.
Small Business Association (SBA) loans can be canceled by having the person authorized to settle your estate complete paperwork requesting cancellation.
When you die, the mortgage on your home must be paid by your estate or by whoever co-signed the mortgage. If the estate cannot pay the full balance, your estate executor may have to sell the home and use the proceeds to pay off the mortgage.
When your mortgage passes to your heir, your lender can request that the mortgage be paid off immediately. If your heirs want to take over the mortgage, they may be required by the lender to prove that they have the ability to repay the debt.
Alternatively, you can take out a mortgage protection insurance policy to ensure that your mortgage will be paid off after your death.
If a home equity line of credit (HELOC) exists but there is no debt and you were the sole owner, your line of credit will be closed. A co-owner of the HELOC may be required to prove that he can repay the borrowed money to keep the line of credit open.
Any debt owed through the HELOC will be claimed from your estate together with any mortgage on the property. If there is a co-owner of the HELOC, he is responsible for the debt.
8. Car loan
If you have an outstanding balance on your car loan when you die and you are the sole signatory, the loan will be paid from your estate. If there isn’t enough money in your estate to cover the loan balance, the lender may repossess your car.
It doesn’t matter who the registered owner of the car is, the vehicle can be repossessed if the loan is not repaid. If you leave the vehicle with someone, they may need to refinance the loan in order to make the necessary payments to keep the vehicle.
Child support payments are not canceled upon your death and will be claimed from your estate. If you have a partner or spouse, some states may consider your partner responsible for continuing to pay child support.
If you think your estate won’t be able to pay your child support obligations, you can buy a life insurance policy to help cover child support. Estate planning is crucial when you are supporting children and you need to continue supporting them.
Formerly called spousal support, spousal support ends when you die. However, depending on the state and the support agreement, the spouse who was previously receiving payments may claim the remaining amount owed to your estate or any life insurance policy you have.
The only debt that really disappears when you die is federal student loans. All other debts may need to be repaid by a co-owner, co-signer, spouse or your estate.
If you want to lessen the impact of this debt on your spouse or estate, consult a financial planner to determine which debt to pay off first or how to repay debt entirely.
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