Do people’s debts go away when they die?

The Consumer Financial Protection Bureau has a great post about this and the answer is the debt does not go away. However, there are some interesting points that are worth mentioning:

• If you were an authorized user on a credit card account belonging to the person who died, that does not make you responsible for paying their credit card debt.

My client’s other question is whether the heirs have to pay the deceased debt? And the answer is, no they do not. The state of the deceased which includes all its assets is responsible for paying the deceased debt. The heirs will inherit what is left.

But what if the state of the deceased does not have enough assets to pay their debt? Then in this case some debt will remain unpaid.

So do I really need to have life insurance to pay all debt like a mortgage, car payments, medical bills, etc.?

• Mortgage payments: In the case of a mortgage, you are leaving the equity to your heirs. If they want to keep paying the mortgage it is their decision, otherwise, they might want to sell it.
• Car payments: same as above, the heir inherits the equity in the car and can sell it if they prefer the cash.
• Medical bills: This may be the largest debt and will be paid with the assets of the deceased. So if the deceased has a lot of cash or cash equivalents they will be used to pay the medical bills. Real estate may be liquidated to pay it too.

The best way to protect your state from paying your debt is to do state planning. Your state planning lawyer may suggest a living trust or life insurance. Retirement and brokerage accounts can also be protected. An experienced state planning lawyer can help you protect your assets from being used to pay your debts. Eldercare is a free service provided by the US Administration on Aging that will help you find legal services for low-income individuals in your area.

Funeral expenses have to be paid by the family and friends though. Your savings for the funeral expenses may be used to pay your other debts. The best way to guarantee that the person responsible to pay for the funeral expenses will have the funds needed at the time it is needed is to have funeral-burial insurance.

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