Happily, debt is generally not inherited. Your assets are used to pay debts until the assets are gone. But, there are exceptions.


Debt is (Generally) Not Inherited

When you die, either your Will or the State identifies an Executor. That person is responsible for finding everything you own and using that to pay off everything you owe. However, if there is not enough money or other assets to cover all the debts, then the court will help decide which creditors get paid and which don’t.

Any debts that cannot be paid by the estate are no longer due.

If there are any assets left after all the debts are repaid, then they are distributed to the heirs.

The process of paying off your debt and distributing any remaining assets to your heirs is called Probate. The executor cannot distribute any assets to any heirs until all of the debt has been settled and probate is closed.



Excluded Assets

Generally, there are some special assets that are passed to your heirs before any debts are repaid. Retirement accounts, living trusts, and life insurance benefits are usually excluded from the Probate process and pass directly to your heirs, even if that results in some of your debts not getting paid.

However, this only works if the beneficiary is listed and current on those assets. If the named beneficiary has already passed away, or if there is no named beneficiary, then the assets generally have to go through Probate, and may be used to pay off debt.


Excluded Debts

In general, Federal Student Loans are forgiven when the borrower dies or becomes permanently disabled. This is a major reason why you generally should not refinance your Federal Student Loans with private loans of any kind.


Exceptions: Some Debts Can Be Inherited

Even though most debt is the responsibility of the Estate (not the heirs), some debt can be inherited.


Exception: Secured Debt (sometimes)

With some types of secured debt, the heir has the choice of whether to assume the debt or pay it off, usually by selling the asset. For example, if you leave your house to your heir, but there is a mortgage, then the heir may be able to inherit the mortgage and become responsible for the payments. The same is true of car loans.


Exception: Co-Responsible Debt

Other people who share the responsibility for your debt may be required to inherit that debt. That means that a co-applicant, joint owner, or a co-signer will likely become responsible for your debt when you die.


Exception: Spousal Debt (sometimes)

In Community Property states, your surviving spouse could become responsible for your debt that originated during the marriage.

In 2020, the Community Property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.


Exception: Executors Who Break Probate Law

If your Executor does not follow the rules while settling your estate, then they could become responsible for the debts that were illegally forgiven.


The Importance of a Will

Everyone needs a Will.

The Probate process is complicated and there are a lot of moving pieces. You need a Will to name your Executor and to give instructions on how you want your Executor to divide your stuff among your heirs.

Your Will also directs what will happen to your children and your pets when you die. Notice that I didn’t say “if”. We all die. We all need Wills.

Personally, I used LegalZoom to create my will, and I was super happy with the process. I am not affiliated with them and won’t make any money if you use them. Just get a Will!


Update Your Beneficiaries

Not having up-to-date beneficiaries could seriously harm your heirs.

A retirement account with a current, living, beneficiary is generally excluded from Probate. That means your creditors don’t have access to your retirement accounts! But, if you forgot to name a beneficiary, then your retirement accounts get dumped into Probate. That could force your Executor to use your retirement account to pay off debts that may have been forgiven!


Final Thoughts

Nobody likes to think about death. But, the reality is that none of us are going to make it out of this alive.

A Will is a document that lays out your instructions for what will happen to your stuff, your kids, and your pets when you die. Why would you not want your family to know what you wanted?! Get a Will.

The bad news is that death is coming for us all. The good news is that our heirs are generally not responsible for our debts.

Now, go get a Will.

What to Read Next

For more information, check out these articles that offer more detail about these topics. Enjoy!


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