Debt and the Deceased: How Should Spouses and Heirs Proceed?

When a spouse passes away, it’s normal to be left with questions about the future of your finances. For example, will you inherit their debt? Are you responsible for paying off joint accounts? These are common questions for surviving loved ones.

Proper estate planning can help you resolve these questions beforehand, and it can also reduce the amount of debt you have to pay when a loved one passes. With that said, it’s important to know that even if your spouse does have a plan, there’s still a chance you’ll be responsible for their debt.

What happens to my spouse’s debt after they pass away?

Most of our debt doesn’t just go away when we pass. At the same time, family members aren’t automatically responsible.

Usually, the deceased person’s debt is repaid through their estate. In other words, the assets left behind by the debtor — including their bank account balances and physical property — will be accessed or sold to repay the debt. If there’s still money owed after liquidation, it may not have to be paid.

However, there are some cases when family members are responsible for a loved one’s debt after they pass. According to the Federal Trade Commission (FTC), these are the reasons you may have to pay a spouse’s debt:

• You’re a cosigner.
• You live in one of nine community property states (AZ, CA, ID, LA, NV, NM, TX, WA, WI).
• Your state requires you to pay certain types of debt, such as specific healthcare expenses.
• You were responsible for resolving the estate but didn’t follow probate laws.

In general, federal student loan debt is the only type of debt that’s forgiven after the borrower passes away.

What do I do if a loved one passes away without an estate plan?

If a loved one or partner dies suddenly, and they haven’t left behind an estate plan or informed you of their financial situation, here are immediate actions to take.

Act quickly

Sudden grief makes dealing with money issues difficult. Nevertheless, it’s important to get qualified legal advice right away and gather key documents related to the deceased’s overall financial picture, including debt documents.

Inform third parties

Identity thieves watch death notices and can try to gather a deceased person’s credit and other personal data from a variety of sources. To be safe, notify the three main credit bureaus (Equifax, Experian and TransUnion) and the deceased’s lenders to let them know the borrower has died.

If any accounts are held jointly, the co-borrower may be advised to remove the deceased’s name from the account.

Six ways to plan ahead

Many of us want to avoid conversations that have to do with losing a loved one. However, discussing the inevitable and making plans in advance can give you both so much more peace of mind before and after a loss. Here are some things to do right away.

1. Be honest

Are you hiding information about your debt? It is not always easy to tell your spouse or children you have problems with debt. But there’s a good chance they’ll learn about it after you pass away.

Instead of keeping quiet, start by letting your spouse know you’re struggling, and work your way toward full, mutual disclosure of your financial status. When you’re ready to share all of the details with each other, consider reviewing your free credit reports from AnnualCreditReport.com together to confirm that you’re fully aware of each others’ debts.

2. Seek qualified advice

Every couple can benefit from consulting with qualified financial counselors and estate-planning experts.

For resources on managing debt, talk to an NFCC-certified credit counselor. For estate planning, talk to a lawyer or licensed financial advisor in your state about how to manage debt issues as part of your financial strategy and your estate.

3. Organize documents

Make things easier for your loved ones by getting organized. Consolidate your important financial documents in one, safe location, and keep the files up-to-date. Ideally, this would include all of your asset, debt and tax documents.

4. Know what needs to be repaid

It’s especially important for borrowers and their executors — the person who’ll manage your estate after you pass — to know what debt needs to be repaid versus being canceled or forgiven.

Generally, federal student loans are the only type of debt forgiven after you pass away. But unsecured debt (or debt with no collateral) that’s held in the deceased’s name only, can be discharged if there’s not enough money in the estate to cover it. Unsecured debt includes:

• Credit cards
• Student loans
• Personal loans
• Payday loans
• Collection debt

5. Examine joint debt

Family members who have joint credit accounts could be responsible when their co-borrower passes away. For loans, the cosigner will always be responsible. If you’re not sure what will happen, check with an attorney to find out about your liability.

Experts will not only advise how to deal with individual situations, but they may also make helpful suggestions. For example, they will often encourage you to apply for at least one credit card in just your name while your spouse is still alive. Why? Because having a separate account allows you to build your own credit scores now, and maintain them after your spouse passes.

6. Prepare for special debt situations 

All debt situations are different. For example, if you qualify for nursing home care through Medicaid, your survivors may need to cover certain costs after you pass away. In some cases, this could mean your survivors have to sell your home. You can imagine why it’s important to prepare relatives for these scenarios in advance.

Alternatively, let’s say you leave your home to heirs but you still have a mortgage or overdue property taxes. Discussing these issues in advance gives relatives a chance to prepare or even solve the problem up front.

Jason Alderman directs Visa’s financial education programs.
This article is intended to provide general information and should not be considered legal, tax or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.