What Happens To Debt When You Die?

There’s an old saying about what happens to your money when you die: You can’t take it with you. The same is true of your debts.

So, what happens to debt when you die? By educating yourself on how debt can outlive you, and knowing which balances could come back to haunt your family, you can obtain the proper life insurance coverage now, so they aren’t left with that financial responsibility later.

Let’s take a look at what happens to your debt after you pass away, and how you can best prepare.

What Happens To Your Debt When You Die?

Let’s say that you alone opened a credit card. You alone decided to get a mortgage on a home. And you alone borrowed money for college.

The accounts undoubtedly belong to you, so why should someone else be responsible for that debt if you died? Shouldn’t the balance simply go away if you suddenly ceased to exist?

Unfortunately, even if you were to pass away, it doesn’t mean that your debt dies too. Your estate will need to cover what’s owed, and depending on the type of debt it is and how much your estate can actually cover, your family members may have to make up the difference to satisfy that debt.

There are some types of debt that are forgiven in the event of your death (which we’ll talk about in a moment) but by and large, your creditors will want to get paid what is due.

Who Is Responsible For Paying Your Debt When You Die?

Technically, your remaining debt will be the responsibility of your estate and is paid using assets you left behind, by whomever you charged with being its executor.  

There are some instances where certain family members can be held responsible for debt that the deceased held, but the circumstances vary based on the type of account.

Here are a few common examples.

Responsible By Proxy

Any money owed will be satisfied by your estate during probate, before the remaining assets are disbursed to your beneficiaries. Why is this important?

Let’s say you planned to leave $100,000 in assets to your two children, both of whom would receive $50,000 upon your death. However, you die suddenly with an outstanding balance of $40,000 on your credit cards. This debt won’t disappear; instead, it will be paid first by your estate. This would obviously cut into the amount that your children would have otherwise received. Rather than both getting $50,000, they’ll now receive only $30,000.

Co-Responsible

If you were a co-signer on a mortgage loan, auto loan, personal loan, or credit card, your co-borrower will typically be responsible for any remaining balance after your death. This holds true even if there is nothing left in your estate after probate.

For private student loans, the death of one co-borrower can technically trigger a default in some cases, prompting the lender to demand the entire balance due immediately from the surviving co-signer. There are some exceptions to this, but each private lender handles the situation differently.

When The Debt Actually Does Die With You

A handful of balances can actually “die with you,” but they are few and far between.

The most common of these involves federal student loans. If you pass away, your federal student loan debt will be discharged, meaning that neither your loved ones nor your estate will be responsible for the balance due. This includes Parent PLUS loans, even though they technically have a surviving co-signer.

Another way in which a debt can “disappear” upon your death is if the total of your debts is greater than the value of your assets. In this case, the estate pays as much debt it can cover that is in your name only. However, depending on the situation and type of debt, your loved ones may still inherit the responsibility to pay.

Which Types Of Debt Can Be Inherited?

For the most part, the types of debt that can be inherited include:

• Loans you co-signed for with another person.
• Joint loans or lines of credit you opened with someone else, such as a spouse. The surviving co-borrower will continue to pay based on the initial terms of the loan.
• If you live in a community property state, you might be responsible for a loan your deceased spouse took on individually, but only if it was after you were married.

How Are Different Debts Paid Off After A Death?

Depending on what kind of loan the deceased was responsible for, the process and rules for paying off the debt are different. Here is how common types of debt are paid off:

Mortgage Loans

If you took out a mortgage loan with another person, the surviving borrower will be responsible for making payments.

If there is no co-signer, no one is required to take on the mortgage. However, if the person who inherits the home decides they want to keep it, they will assume responsibility for the mortgage. If they decide to ultimately sell the home, they will still need to make mortgage payments until the property is sold.

If no one takes over the mortgage, then the mortgage servicer can begin the process of foreclosing on the home to recover the amount owed.

Auto Loans

The typical car loan will have language, sometimes referred to as a death clause, that lays out how the lender is to be repaid if the car owner dies.

If there is a co-borrower on your car loan, that person will be responsible for making payments.

If there is no co-borrower, the person who inherits the vehicle has options:

• Sell the car to pay off the loan.
• Keep the car and make payments (may need to qualify to maintain existing loan terms or get a new loan).
• Let the lender repossess the vehicle.

Student Loans

What happens to unpaid student loans depends on the lender. One of the key benefits of a federal student loan is that it’s 100% discharged upon death — meaning it does not have to be paid back. The deceased’s family or an executor will have to provide a death certificate to get the loan discharged. The same provisions also apply to federal parent PLUS loans.

Student loans through a private lender are much harder to get forgiven. Some private lenders, including Sallie Mae, will discharge a student loan upon death, others will not. In these cases, the unpaid amount is passed on to the person’s estate to pay off the loan.

Personal Loans

In the case of an outstanding personal loan, the estate is required to pay the full balance of the loan before any funds can be disbursed to beneficiaries. If the estate is unable to cover the balance, the remainder will go unpaid in most cases. In states with community property laws, the person’s surviving spouse may be responsible for the debt. Likewise, if the personal loan was a joint account or line of credit, the surviving person on the account would be responsible.  

Credit Card Debt

A person’s credit card debt would be treated exactly the same as the outstanding balance on a personal loan, as described above.

What Assets Are Protected When You Pass Away?

There are ways to protect your estate and family members from creditors after you die. Generally, your estate must pay off your debts. However, creditors cannot make a claim on certain assets, such as life insurance policies, retirement accounts or trusts.

Money left in an individual retirement account (IRA) or 401(k) might be used to pay final bills under some circumstances. It depends on whether the account has a designated beneficiary other than the estate at the time of death.

How To Notify Creditors Of A Death

The executor of the estate should publish a death notice in a newspaper announcing the death. Depending on the state, this notice may have to run for a certain time to allow creditors to come forward with a claim. It’s helpful for the executor to get a copy of the deceased’s credit report so they can notify credit bureaus with a copy of the death certificate as soon as possible.

How To Protect Heirs From Debt When You Die

Most people like to think that they’ll be able to leave something behind for their loved ones and perhaps even a charity when they die. There are ways to legally shield many of your assets from potential creditors who may emerge with a claim on your estate after your death. Here are a few.

Plan Your Estate

Work with an attorney or estate planning professional to draw up paperwork that outlines how your assets should be distributed, focusing on costs and strategies to ensure beneficiaries ultimately pay less in court costs and fees.

Make A Will

When creating a will, keeping language clear will avoid confusion about your wishes. Consider including details about the following:

• Name an executor
• Designate beneficiaries
• What properties and assets will be included
• What debt will need to be handled
• Any special wishes

Pay Off All Your Debts

There are multiple ways to reduce or pay off debt in an effort to have the value of your assets cover the cost of your debt should you pass away. Strategies include:

• Increasing your income through a side business or negotiating for a higher salary.
• Spending less on subscriptions or services you don’t use.
• Consolidating debt to focus on a single manageable payment.

Buy A Life Insurance Policy

Money you invest in a life insurance policy protects your heirs because insurance regulations prevent creditors from raiding your policy away from your beneficiaries even if you have debt. Only the people listed in your policy can collect on it. The only way creditors can access these funds is if all the beneficiaries die before you and you don’t name a new one, or if you list your estate as the beneficiary.

Set Up An Irrevocable Trust

Frequently Asked Questions: What Happens To Your Debt When You Die?

Who contacts creditors when a loved one dies?

The executor of the estate is responsible for publishing a notice of the death, and providing creditors with a death certificate. If the deceased did not name an executor in their will, the court will name one or invite family or friends to volunteer. 

What happens to credit card debt when someone dies?

The estate of the deceased is responsible to pay the debt. If the estate does not have sufficient funds, the debt may be erased or, in community property states, become the responsibility of the spouse or any co-signer. 

What happens if a co-signer dies?

On most loans, if a co-signer dies the surviving co-signer is responsible for the remaining balance of the loan. With some private student loans, the lender may consider the loan to be in default, at which point the loan may be due in full.

What types of debt go away when someone dies?

Typically, credit card debt, medical debt and personal loans are discharged or covered by the deceased’s estate. In addition, federal student loans and most Parent PLUS loans are discharged as well.

The Bottom Line: It’s Important To Know What Happens If You Die With Debt

Keep track of your assets and the different types of debt you carry as well as which ones are solely in your name or with another borrower or co-signer. Ideally, your assets are far greater than your debts, so that if you die your estate will be able to pay your debts comfortably, with plenty left for your beneficiaries.

The Rocket Money℠ app can help users stay on top of debt payments and track their overall spending. Get on the road to more informed and better financial management by downloading the Rocket Money app.