Collectively, Americans owe a lot of money. In fact, according to data from Experian, one of the three major consumer credit reporting agencies, total outstanding consumer debt climbed to $14.88 trillion in 2020.
This is a 31% increase since 2010, and our collective balances on mortgage loans, student loans, and personal loans all hit new records in 2020. With so many people owing so much, many Americans may wonder what happens to this debt when they die.
This guide will help you understand what happens to your outstanding loan balances if you haven't figured out how to get out of debt before you die.
Who is responsible for your debt after you die?
When you die, your debt does not just disappear. Instead, your estate becomes responsible for repaying any debts you owed. Your estate is all the money and assets you left behind.
Someone known as an executor handles your estate and is responsible for paying creditors what is owed out of your assets. To be clear, the executor of your estate is not responsible for paying your debts with their money. Making sure your creditors are repaid is part of their job responsibility during the probate process (the legal process by which assets are transferred after your death).
When your assets pass through probate, creditors can go to court and make a claim against your assets. As a result, your heirs might receive less money or property because some of the wealth you've left behind goes toward repaying your debt.
If your estate doesn't have enough money to pay back the debt, creditors typically cannot collect from your family members. However, there are a few exceptions to this. The following people could potentially be held responsible by debt collectors for covering your unpaid debt balances after you've died:
- The cosigner of a loan
- Joint account holders
- Spouses in community property states — these include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Types of debt and what’s owed after your death
Your car loan balance should be repaid out of your estate assets. Creditors could also try to collect payment from a cosigner if someone cosigned with you for your auto loan. They could also try to collect from your spouse in a community property state.
If your estate does not have enough assets to pay off the car loan and there was no cosigner, then the lender cannot try to collect from other surviving family members.
When talking about debt, it’s important to understand the difference between secured vs. unsecured debt. A car loan is a secured debt. That means the lender could repossess the vehicle in question to recoup its money.
If your heirs who inherit the car want to keep it, they will have to pay off the lender. If they don't have enough money to repay the entire loan balance, they might need to refinance the loan into their own name in order to keep the vehicle.
As with other types of debts, unpaid medical bills must be paid by your estate after you die. If you don't have enough money in your estate, then creditors will attempt to collect from a cosigner if you have one or from a spouse in community property states.
Some states also have filial responsibility laws, which require children to financially support insolvent parents. In these cases, it's possible that medical loan providers could try to collect from your children. However, it's not common for these laws to be enforced because Medicaid usually covers medical bills for insolvent parents.
If Medicaid paid your medical bills during your lifetime, it might try to recoup the money spent from your estate after you die. Although it can take assets from your estate to do so, Medicaid cannot take your wealth if you have a surviving spouse, a child under 21, or a child with blindness or a disability.
Medical debt is unsecured, so if there's no one legally responsible for paying it (such as a spouse) and there's insufficient assets in your estate to pay for it, there's nothing the creditor can do to try to collect.
Credit card debt
Again, the estate is responsible for paying credit card debt. If the estate has insufficient funds, then any joint account holders or spouses in community property states can be held responsible for paying off the card balance.
Authorized users, however, do not become responsible for paying any unpaid balance just because they were entitled to use the credit card account.
A credit card is unsecured debt. If creditors make a claim against the estate and there are insufficient funds to pay it and there's no joint account holder or spouse who is responsible, the credit card issuer is out of luck. There is nothing to repossess and nothing more the issuer can do to collect.
Mortgage and home equity loans
Cosigners or co-borrowers are responsible for covering mortgage debt when you die. This is true even if the cosigner or co-borrower has no legal right to the house. In other words, a person who isn't on the deed who cosigned for a mortgage can be responsible for repayment of the loan even if they have no right to ownership.
If someone inherits the house, they will need to make mortgage payments in order to keep the home. Usually, if a transfer of ownership occurs on a mortgaged property, a due-on-sale clause requires that the mortgage loan be repaid in full upon the transfer. However, in cases where someone inherits the house, those laws usually don't apply. Typically, heirs can take over ownership, assume responsibility for the mortgage, and continue making payments on the same loan as the deceased owner had.
If someone inherits a house and does not choose to keep making payments on it, the bank could foreclose on the house to recoup its funds. If someone inherits the house but can't afford the payments, it's possible the lender might be able to help them work out a loan modification or explore other loss mitigation options to avoid losing the home.
Student loans work differently than most other loans, and how they are handled will depend on the type of student loan.
If you have federal student loans, creditors will not try to collect from your estate or even from a cosigner. Your loans are discharged upon your death. This is even true of Parent PLUS Loans. If your parents took out PLUS Loans to help you pay for school and you die, the loans will be discharged.
Some private student loans provide for discharge upon death, but not all do. It's possible that your estate or cosigners will be responsible for repaying your private loans if you die while there is still a balance. It depends on your lender's rules.
If you and your spouse filed a joint tax return, you're both responsible for the tax debt that you owe. If you die with unpaid tax debt, your spouse will be responsible for covering it. The IRS can also try to collect from your estate if you die.
If you do not have enough money in your estate and are unmarried or your spouse is granted what the IRS calls innocent spouse relief, then the IRS cannot try to collect from other heirs.
What creditors can and can't take
Creditors are allowed to take any of the estate’s assets that serve as collateral for debt that isn't paid. This means if an auto loan isn't paid after death, creditors could repossess the vehicle. If the mortgage isn't paid, the lender could foreclose.
Creditors are also allowed to make a claim against the deceased's estate. When probate is opened, creditors receive notice. The creditor can then file a claim in probate court. State laws specify the order in which debts are paid. Generally, secured debt is paid first, followed by funeral expenses, medical expenses, a family allowance to those relying on the deceased for support, unpaid claims to employees, and finally other unsecured debt.
Most estate assets can be taken to repay creditors. However, state probate laws may provide protection for retirement accounts and proceeds from insurance policies. And creditors usually cannot access any money held in an irrevocable trust.
If the estate is insolvent, then creditors might not be paid back in full and could try to collect from cosigners or spouses in community property states.
Collectors are allowed to contact the deceased person's spouse, parents (if the deceased was a minor), or guardian to discuss any remaining debts. Collectors can also contact the executor, administrator, or other parties with the power to repay debts that are owed. Collectors are allowed to contact other relatives only to get the name and address of the executor or those responsible for debt payoff.
How to help your loved ones with debt
Estate planning could help you reduce the likelihood that your loved ones will end up becoming responsible for paying your debt, or will end up losing a part of their inheritance due to your unpaid debt.
You might be able to arrange for your assets to pass outside of probate so creditors can't make a claim against your estate to recover outstanding debts. Or if you buy a life insurance policy, the death benefit could pay off your debt so your loved ones are not burdened with it.
This is especially helpful if you have joint mortgage debt with your spouse or other loved ones and you want them to own the house free and clear when you die. You can research the best life insurance to find a policy that provides a death benefit that's large enough to repay the entire balance due.
What debts are forgiven when you die?
Only federal student loan debt — and sometimes private student loan debt — is forgiven when you die. Your estate can be held responsible for repaying all other debt you owe. Cosigners can also be held responsible for payment, as can spouses in community property states.
Do credit card companies know when someone dies?
The executor of the deceased person's estate or the deceased's surviving spouse should alert the credit card company to the death of the account holder. The credit reporting agencies — Equifax, Experian, and TransUnion — should also be notified to prevent identity fraud. The Social Security Administration will notify the credit reporting agencies if your executor or spouse doesn't do so.
Is the wife responsible for a husband's debt after death?
If a wife cosigned or jointly borrowed with her husband, she is responsible for the shared debt after the death of her husband. In community property states, spouses can also be held liable for their spouse's debt acquired during the marriage. They may be required to pay back this debt out of community (shared) property.
In some cases, your debt dies with you. But in many other situations, cosigners or spouses end up responsible for repayment or creditors are able to make a claim against your estate, so the inheritance your loved ones receive is reduced.
But with careful estate planning, including understanding how life insurance works, you might be able to avoid these consequences and ensure your debt doesn't become a burden for your family after your death.
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