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Most of us don’t consider who will be responsible for our debts after we die, but it’s important to know what will happen to your money in a worst-case scenario. Even after you’re gone, your outstanding debts could have a significant impact on your loved ones.

This article will explain what happens to debts after a person dies. Keep in mind that different kinds of debt work in different ways—while certain debts may be forgiven, your family may have to pay others off.

Your Estate

Once a person dies, their debts are usually paid in part or in full by their estate. In addition to managing debts, the executor of your estate will be responsible for distributing your assets and making sure your obligations are fulfilled.

If you died with a $10,000 balance, for example, the executor will need to either use $10,000 in cash or sell your assets to pay back the debt. Having more liquid assets than debts is the best way to guarantee that all your possessions will be passed on to family and friends.

This will likely be the only step in the process if your estate contains more value than your total debts. On the other hand, things can get significantly more complicated if your estate can’t cover your outstanding debts.

Which Debts Are Settled After Death?

Many kinds of debts are legally resolved once the debtor dies, but creditors may be able to collect certain types of debt from your loved ones. This section will cover the main varieties of debt which will and won’t be forgiven after you die.

First Considerations

Regardless of the kind of debt involved, there are a few situations in which your spouse or other relative will likely be required to cover any remaining balances. Even debts that are typically forgiven will likely be passed on in these cases in the event of your death.

Co-Signers

Someone who co-signs on a loan accepts liability if the main borrower is unable to pay, and they’ll become responsible if you pass away. Before asking someone to co-sign, make sure they understand the full implications of what they’re getting into.

Community Property

Only some states have community property laws: Wisconsin, Washington, Texas, New Mexico, Nevada, Louisiana, Idaho, California, and Arizona. If you live in one of these states, debts taken on during your marriage will be passed on to your spouse. On the other hand, they won’t be responsible for any debts you incurred before you got married.

Joint Accounts

Like co-signing, becoming a joint account holder makes you liable for any balances on that account. Don’t forget about the legal implications when deciding whether to open joint accounts or keep separate accounts. Of course, a joint account may also be easier to manage if you budget together.

Debts That Pass to Relatives

Some debts are more likely than others to remain an issue, although the specifics can vary widely depending on your specific situation. These are a few of the debts that commonly pass on to a person’s relatives if the estate can’t cover the entire balance.

Home Equity Loans

Home equity loans can be one of the most difficult things for your relatives to pay off, as someone who inherits the home can be forced to pay off the entire balance. If they aren’t financially prepared, they may need to sell the home entirely just to cover the loan payment.

On the other hand, lenders are generally willing to let this go if the new owner is willing to work with them on a fair payment plan, especially since they inherited the home after a death. Your relatives may be able to come up with a solution, although they can always sell the home to avoid loan payments.

Mortgages

Like home equity loans, mortgages pass to a joint owner or go to the recipient stated in the deceased’s will. That said, lenders don’t have the power to force joint homeowners to pay off an entire mortgage at once, so they’ll simply take on the existing mortgage.

Without a joint owner to take the home, your remaining mortgage may be paid from your estate. If that’s not possible, whoever receives the home will be responsible for mortgage payments and may need to contact the lender to develop a mutually beneficial plan.

Auto Loans

Like home equity loans, auto loans are secured by the value of the car. The lender can repossess the car if the borrower is unable to pay, and this applies to whoever inherits the vehicle after the original owner dies. Again, your executor will have an opportunity to finish paying off the loan using assets in your estate.

With that in mind, the best option for passing on a car is leaving it to someone who could use the vehicle and has enough money to continue paying off the loan. The lender probably won’t cause any trouble as long as the new owner makes on-time payments.

Debts That May Be Forgiven

Fortunately, not every form of debt will necessarily go on to your relatives after your death. Some unsecured debts are forgiven when the debtor dies, and the creditor may not have any options for recovering the balance.

Credit Cards

Credit cards generally aren’t secured, so creditors assume the risk that you won’t be able to make payments. Of course, the balance will simply pass to your spouse or relative if they’re listed as a joint holder, while those in your name will be forgiven if the estate can’t cover the remaining debt.

Keep in mind that an authorized user isn’t the same as a joint account holder—only joint holders are held responsible for debts. Similarly, you should remember that community property laws may make your spouse responsible if you live in one of the states listed above.

Student Loans

Student loans are regulated differently depending on whether they were received from a private or public lender, so it’s important to understand the kind of debt you have. While some lenders like Wells Fargo and Sallie Mae forgive student loan debt if the student dies, private student debt can also pass on to your family members.

As with other kinds of loans, any co-signers on a private student loan will be liable for your entire remaining balance. Community property laws are also relevant—so your spouse may have to continue making payments if you took out the loan while you were married. Again, community property laws don’t apply if you incurred the debt before getting married.

What About Debt Collectors?

It’s not uncommon for family members to receive calls from debt collectors when someone dies, and this is legal if they have reason to believe that you’re a close relation who may be responsible for the debt. This is a common step toward agreeing to a payment plan that works for both sides.

On the other hand, it’s explicitly illegal for debt collectors to make your family members believe that they’re legally liable for debts that they aren’t actually obligated to pay off. For that reason, it’s critical that they know their rights and aren’t convinced to make a payment that isn’t required.

The Fair Debt Collection Practices Act, or FDCPA, outlines rules and regulations for debt collectors. For example, they also aren’t allowed to ask other family members for anything beyond contact information. You can stop debt collectors from contacting you by sending a letter, but this doesn’t remove responsibility for the debt.

What Can Creditors Take?

If there isn’t enough value in your estate to cover your outstanding debts, creditors may attempt to take other assets. While this is legal in certain cases, it’s important to know exactly what they’re permitted to use to complete debt payments.

As mentioned above, equity in a home or car is often used as loan security, and these are often repossessed if the owner is incapable of making payments. On the other hand, other kinds of value aren’t available to creditors, and you should consider this when deciding how to store your money.

Life insurance payouts, for example, are completely inaccessible, and they can be a great way to shield your surviving family members from debt. This applies to both term and permanent life insurance policies, although term policies are generally a better investment.

Like life insurance policies, retirement accounts are also safe from creditors in the event of your death. These funds will be distributed as described in your will. People often put their wills off until it’s too late, but this is something to think about from a young age—it’s never too early to be prepared.

Debt laws and regulations can be extremely confusing, but it’s important to understand exactly what will happen to your debts and assets after you die. These are just a few of the most common ways in which different debts are handled following a person’s death.