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What happens to your debts when you die?

The goal of a comprehensive estate plan should be to properly allocate your assets in such a manner as to allow distribution to your heirs according to your wishes. One component is wealth preservation. This element works to prevent unforeseen or inadvertent tax burdens from eroding a decedent's estate.

But what happens if you were to die with substantial debts? Fortunately, in most instances, your heirs will not be required to pay those debts. In most cases, a lender cannot go after your spouse or other members of your family. Of course, if a spouse or adult child is a cosigner or co-obligor on a debt, they would be personally responsible for satisfying those debts.

However, your death does not extinguish all obligation to repay those debts. They will become the debts of your estate. Depending on the size of your debts and that of your total estate, your family may receive a diminished distribution. If you have significant debts, they could receive nothing.

With a recent study finding that the "Average American" dies with more than $60,000 in debt, it suggests that many families may find themselves in financial difficulty, especially if there is no estate plan in place.

While they may not have to cover most of your debts after you die, if they live in a mortgaged home and they are not on the mortgage, your lender is likely to demand either they refinance the home or pay off the mortgage. If they cannot afford that, they will likely be forced to leave the home.

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