We all want to leave behind something for our loved ones to remember us by after we have passed away. One thing that we want to avoid passing on to our children or family members are high debt balances. Dealing with the passing of a loved one is hard enough, without having to inherit their financial obligations. In an ideal world, we would leave behind nothing but happy memories and hopefully some sort of financial boon for later generations. Unfortunately that is not always the case. With more and more people finding it difficult to make ends meet, the chances of having your finances in order at the time of your death becomes more of an issue. Here we look at who is responsible for your debt when you die, and how you can protect your loved ones from inheriting your financial obligations.

What happens to your debt?

The first question commonly asked is what exactly happens to your debt in the event of your death? There is no simple answer to this question as it depends on several factors. A common misconception is that the debt is simply forgiven, however that is not always the case. If the debt is held in a joint account, for example a married couple that are both responsible for the debt, the surviving spouse may in fact be legally obligated to pay off the debt even if they did not incur the debt. If the account is held in your name only and there are no other arrangements made for paying off the debt or having it forgiven (some contracts allow you to opt for protection in the event of your debt, having your debt forgiven at the time of your death), the debt will most likely be repaid through your estate. This means that your beneficiaries will not receive the full amount of benefits until your debt has been repaid. In the event there is not enough money in your estate to cover your financial obligations, and barring other circumstances which legally obligate an individual to repay the debt, it may be forgiven.

Make arrangements in advance.

To save your family and loved ones the additional stress and heartache that results from dealing with estate attorneys and collection agencies, it is suggested that everyone make arrangements as to how their debt will be handled in the event of their death. Of course, death is not something that can be anticipated in many cases, therefore it is important for people of all ages to have a will and estate plan which dictates how their finances will be handled at the time of their death. By taking the time to make these arrangements today you can save your family a great deal of trouble, both emotionally and financially at a time when they are least prepared to handle additional burdens.