Leaving Debt When You Die

Preparing for your death is a responsible, mature step towards making sure your family and loved ones suffer as little as possible. If you have a lot of outstanding debts when you pass away, there is a chance your spouse or heirs could be held liable for repaying those debts. Specific laws and procedures vary based on the state you live in, the type of debt you have outstanding when you die and what assets you leave in your estate.

Probate Court

In most states your estate will be sent to probate court after you die. The probate court will list all of your personal assets including cash, retirement funds and property, and all of your outstanding debts. The court will use part or all of the assets to pay off valid debts. If any portion of your assets still remain after all debts have been paid, then the remaining assets will be distributed according to your will. If you do not leave a will, the assets will be turned over to the state for a decision on how to distribute them.

Estate Administrator

You may designate an estate administrator before you die or the probate court may designate one for your estate after the fact. The account administrator, or executor, is responsible for notifying all creditors of your death, arranging and paying for the funeral and ensuring all of the legal paperwork is in order.

Community Property States

In a community property state, the assets and liabilities of married couples are treated legally as belonging to both the husband and wife regardless of whether both names are on the paperwork. This means even if you have outstanding debts in your name only, your spouse will be held legally liable for those debts after you die if you live in a community property state. For tangible assets such as a home, the probate court may decide to order the sale of that asset so that it's corresponding debt can be paid.

Joint Account Holders

If you do not live in a community property state, the probate court normally takes care of liquidating assets to repay all of your outstanding debts. If you have a joint account holder or co-signer on a debt however, such as having a joint credit card with your wife, the other account holder will have to pay off that jointly held debt after you die.