What happens to the debt?

Elizabeth is a high school student, who is studying Dave's "Foundations in Personal Finance" curriculum. She calls in to ask what happens to someone's debt when they die, and there are no heirs to take responsibility for what they owed.

QUESTION: Elizabeth asks Dave a question for her high school class at Columbia City High School in Fort Wayne, Indiana. They want to know what happens to your debt if you die with no heirs or relatives to take responsibility for what you owed. Dave is pleased to hear Elizabeth’s class is using his “Foundations in Personal Finance” curriculum.

ANSWER: In many cases it simply does not get paid. Relatives or heirs of the deceased are not responsible for a family member’s debt.

Let’s say someone’s parents died, and at the time of their death they had $100,000 in debt. Heirs are not automatically responsible to take on the debt. The only way that debt will be paid is if they owned enough stuff — if they had enough in the way of assets — to pay the debt. If they owned a $200,000 home, and that house was paid for, it would have to be sold in order to pay the debts. Their estate would be the only thing standing good for the debt. If they owned nothing, and had no co-signers on any of the debt, the creditor would not get paid. The bank lost that money.

Please tell Mr. Ambrose I said thank you for leading the class.