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Who Inherits Your Debt? | March 16, 2012 | 02:19 PM EDT

If you’re insolvent when you die — meaning your assets are insufficient to cover your debts —there’s little to discuss. All debt disappears with you.

The executor of your estate will attempt to sell whatever collateral you have and pay off your creditors to the extent possible.

Everything else gets written off as a loss.

Those you leave behind, however, will not be responsible for making the creditors whole.

That is, of course, unless one of them co-signed for a loan or agreed to act as a guarantor.

In that case, says Mendels, the co-signer would be on the hook for any remaining balance after the original borrower dies.

That includes adult children who co-sign for an aging parent, or promise to cover medical or housing bills if their parent passes away.

“When you co-sign for something, you make a commitment to pay off that loan on the debtor’s behalf if they are no longer able to,” says Mendels. "That’s one of the many reasons people have to be careful about co-signing.”

The same is true with joint credit cards between husband and wife, says Frye.

If your dear departed used the joint credit line to restock the closet with designer duds, it’s you who gets stuck holding the bill, even if it wasn’t technically your spending spree.

Pay as You Go

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