Death and Your Debt
None of us will live forever and there are a host of different circumstances that lead people into debt. A common concern among individuals is how their debt will affect their loved ones when they are gone. The major concern is that their heirs will inherit their financial problems and credit obligations. The simple answer to this question is no but as with most things in life there are exceptions.
When someone dies with outstanding debts, their assets are first used to pay for probate costs and funeral expenses and the remaining assets are used to pay off creditors. Until the debts have been paid, assets will not be transferred to family members. An exception to this rule relates to secured assets such as houses or cars and these can be transferred to a 3rd party with debt still attached. As an example, if a person inherits $100,000 of which $50,000 is a mortgage then the heir would assume the $50,000 of debt along with the house. In some circumstances a portion of the deceased property may need to be sold in order to pay off debt. In this case it is up to the discretion of the appointed executor to determine which items are to be sold and if the total amount of assets do not equal the amount of debt owed, than the creditors receive a shorted amount.
Typically debt is not transferred to the heirs, but there are a limited number of circumstances that would obligate an individual to assume the responsibility upon a person's death. If an individual has co-signed a loan then he assumes full responsibility for repayment or if you shared a joint account or credit card you will are also liable for debts.
Although a person's debts cannot be inherited, they can still negatively affect your family after you are deceased. Family heirlooms that you wanted to give your children may be sold to pay creditors. Assets that you hoped would support your family could be taken as well. This should be a powerful motivator to get your financial house in order as soon as possible.