Unfortunately, debt doesn’t just magically disappear when you die. From student loans and car loans to mortgages and credit card debt, the average person leaves behind a burden of $61,554 in unpaid debts, according to Credit.com. But what exactly happens to this debt when you pass away?

The answer depends on a variety of factors, including your assets, the state you live in, who your beneficiaries are, the type of debt you have, and more. Here's what you need to know about managing debts after death and how it can impact what you leave behind for your family.

Who's Responsible for Paying Off the Deceased Person's Debt?

When a person dies, their estate is usually responsible for settling any outstanding debt. The estate includes everything the deceased person owned, such as cash, real estate, and personal belongings. If there's not enough money in the estate to cover the debts, they typically go unpaid.

In most cases, family members are not responsible for unpaid debts unless they share the responsibility, such as co-signing a loan or having a joint account. However, in community property states like Arizona, California, and Wisconsin, the surviving spouse might be held responsible for their deceased spouse's debt.

Besides community property state laws, federal regulations like the Fair Debt Collection Practices Act (FDCPA) prevent debt collectors from unfair practices and ensure they can't mislead family members into thinking they're on the hook for a deceased person's debts if they're not.

What are the Different Types of Debt?

Medical Bills

Depending on where you live, the rules regarding this type of debt can vary. Usually, medical bills are the first debts that get paid out of whatever you leave behind. If you are over 55 and Medicaid foots the bill on long-term care, your home state might claim part of your property to get back what it spent on your healthcare. For those living in community property states, unpaid medical debt will be inherited by your spouse.

Secured Loans

Debts linked to housing and cars are considered secured loans, meaning the loan is tied to the property. If the deceased individual had a mortgage, the house may need to be sold to pay off the debt unless someone else can take over the payments. Similarly, in the case of a car loan, the lender may take possession of the vehicle if the payments stop. Any equity that remains after the loan is paid belongs to the estate. 

Student Loans

In the case of federal student loans, the debt is discharged upon the borrower's death. Some private student loans may also be forgiven, but it ultimately depends on the lender's discretion. However, if someone co-signed the student loan, they could still be responsible for the remaining balance. In community property states, if the loan was taken out during the marriage, the spouse can be held responsible for the debt.

Unsecured Debt

Credit card debt and personal loans are unsecured debt, and creditors can try to reclaim payment from the deceased’s estate. If there are not enough funds to cover the bill, these debts are discharged. Outside of community property states, these debts can only be passed on to joint account holders and co-signers. Authorized users on credit card accounts do not count as joint account holders. 

What About Life Insurance Policies?

Life insurance provides essential protection for families. It's usually protected from creditors and goes directly to the beneficiaries, ensuring the payout remains secure even if the deceased had outstanding debts.

Why Should I Get an Estate Plan?

It's extremely important to have an estate plan in place. Estate planning ensures that debts are paid off in an orderly manner and that your money and assets go to the right people. It's not just about drafting documents.

Caring.com reports that only about a third of Americans have an estate plan, which means most are leaving things up to chance. That doesn't have to be you. With good estate planning, you can set clear instructions on how debts are to be settled, helping to protect inheritances and prevent your loved ones from facing unnecessary stress.

Consider working with a financial advisor to create an estate plan that addresses your debts so your family doesn't have to. Advisors provide peace of mind, with 83% of people who work with a financial advisor admitting that they feel a weight lifted off their shoulders. A knowledgeable advisor will help ensure you have strategies—such as life insurance—to protect your family from dealing with your debts after you're gone.

The Aligned Perspective: Legacy Debt and Estate Planning

When someone passes away, they often leave behind a lot of debt. Thankfully, family members are usually not responsible for paying it off. The deceased person's estate is typically responsible for paying off debts. Survivors only have to pay in limited cases, such as shared loans or community property states. 

Good estate planning and consulting a financial advisor can prevent unnecessary financial strain on your loved ones when you pass. It's important to take steps now to monitor your tax situation, review your retirement accounts, and weigh the potential benefits of a life insurance policy. These measures can go a long way in ensuring your debts are managed, and your future legacy is protected.