What Happens to Debt When You Die?
January 6, 2020
Any debt that you have at the time of your death will be paid back from your estate. Your estate is all of the assets you own. The executor of your will is normally responsible for breaking up your assets to pay off your debts. This process is called probate.
Probate could include selling property, such as houses or cars. If a deceased person’s estate can’t cover the debt left behind, then, in many cases, the lenders have to write off the debt.
The unfortunate thing about using the estate to cover debts is that this could reduce the inheritance left for family members and loved ones. There are also other circumstances where someone else may be responsible for the debt if an estate can’t cover it.
In this guide, we will focus on the general process of what happens to debt after your death. Be aware: laws vary among different states—even among community property states (more on that below). Make sure you are aware of your particular state's laws by contacting a lawyer who focuses on wills and estates. He or she can help you plan accordingly.
Is Family Responsible for the Deceased’s Debt?
Family members are not personally responsible for the deceased’s debt, but may be responsible if they are the executor of the will, cosigned a loan, had a joint account or a spouse living in a community property state. We explain each of these things in the next section.
What Debts Are Passed on to Others?
There are circumstances when others have to pay off the debt that a loved one has left behind. The specific requirements vary by state, but below are scenarios where others must pay the debt.
- Cosigned loans: If someone cosigned on a loan with you and you die, your cosigner is responsible for paying off the loan.
- Joint accounts: If someone with a joint account dies, the other person on the joint account still has to pay off the debt.
Spouses in community property states: Community property states are areas where spouses jointly own most things incurred during their marriage, like debts and personal property.
In certain cases, spouses must pay off their deceased spouse’s debt with community assets. In this case, it is highly recommended that the surviving spouse contact a lawyer or consult an attorney to understand the rights and obligations specific to their state.
The states that have community property laws are:
- New Mexico
Some debts will be passed on and need to be paid. Typically, these are secured debts, meaning that the bank can take control of an asset if it isn’t paid.
Other types might not need to be paid, depending on the situation. Often these debts are unsecured.
What Happens to Mortgages and Home Equity Loans?
Mortgage loans are examples of secured loans. A bank can take control of the house if the mortgage isn’t paid.
- If there’s a joint homeowner, they’re responsible for taking over the mortgage.
- If someone inherits the house, they’re responsible for the mortgage.
If there is no joint homeowner, then the executor can pay off the mortgage using the estate assets. However, there might not be enough money in the estate assets to fully pay off the mortgage. In that case, lenders can repossess and foreclose the house to recover the money.
If no one inherits the house and there’s not enough money to pay off the mortgage loan from the deceased person’s estate assets, then the bank or lender in charge of the mortgage loan can take the property back.
According to rules issued by the Consumer Financial Protection Bureau, mortgage lenders are required by federal law to immediately contact surviving family members and explain how they can continue to pay the mortgage. Mortgage lenders are required to allow family members who have inherited a residential property to take over mortgage payments. The CFPB rules dictate that your heirs do not need to prove that they are able to repay the loan prior to taking over the mortgage.
What Happens to Auto Loans?
In the case of auto loans, the executor of your will can choose to pay off an outstanding balance through the estate assets.
- If someone inherits the car, then they can take over the payments if there aren’t enough assets to cover it.
- If the estate or heir can’t make payments, then the lender can repossess the car.
Like mortgage loans, auto loans are secured, meaning that the property can be used as collateral if payments can’t be made.
What Happens to Student Loans?
Federal student loans are automatically discharged upon the borrower’s death, meaning that no one has to pay them back. Some private loan lenders also discharge the debt upon death, though not all do this.
- If the estate isn’t enough to cover the loan the lender can’t collect unless someone cosigned or the borrower was in a community property state.
- Spouses in community property states are responsible for student loan debt if it was incurred during the marriage.
- The loan is discharged for parents who have borrowed money under the Parent PLUS program if either the parent or the student dies.
What Happens to Credit Card Debt?
If there isn’t enough money in a deceased person’s estate to pay off any remaining credit card debt balance, there’s no way for the credit card companies to get their money back—and no one to pay it back.
However, there are certain circumstances where someone else may be responsible for paying back the credit card debt.
- If the credit card debt is part of a joint account, the person attached to this joint account has to pay back the debt as well.
- Authorized users are not financially responsible for the accounts they are authorized on, so they’re not responsible for paying the debt. It is illegal to continue use of the card, and you should request to be removed.
What Happens to Medical Bills?
Similar to the other loans listed in this section, medical bills are not the personal responsibility of others unless that person falls into one of the following categories.
If the estate isn’t enough to cover it, then the lender can’t collect unless someone cosigned or the individual was married and in a community property state. Of course, check your individual state laws.
What Happens to Debt When You Die If You Have No Estate?
If a person has no estate when they pass away, then the executor needs to notify the creditor and explain that there is no money left to pay off the debt. They must also include a copy of the death certificate.
What are My Loved Ones’ Legal Rights When I Die with Debt?
While it seems like there’s a lot of responsibility that could be left to a deceased person’s loved ones, there are a few things they’re still entitled to.
Creditors cannot take from retirement accounts with named beneficiaries or life insurance policies. Upon death, the law divides your remaining assets into two categories: exempt and non-exempt. Exempt assets cannot be used to cover your remaining debts. Life insurance policies and retirement savings are both exempt. Creditors and debt collectors have no right to take these from the beneficiaries in order to pay off the debts of the deceased person. This money isn’t a part of the probate process.
However, money from life insurance may go into the deceased’s estate if they are one of the life insurance beneficiaries.
Creditors can’t mislead people into thinking they’re responsible for paying debts. The FTC says that creditors and debt collectors can talk to a spouse, parents (if the deceased was a minor), guardians, the executor, administrators and others authorized to pay debts as mentioned above.
However, your inheritors have the right to request that creditors stop contacting them. Under the FDCPA creditors are prohibited from harassing your inheritors.
How Can I Manage Debt and My Credit Before I Die?
Remember that if you’re worried about your debt after death and leaving assets behind for your family members and loved ones, we highly recommend that you consult an attorney who can help you plan your estate, and is knowledgeable about the laws of the state where you live. It’s also helpful to manage your debt now to alleviate future stress on your loved ones.
While you’re managing your debt, you may find a few errors on your credit report along the way, like late payments that were never late or inaccurate charges. Mistakes like these not only cost you financially but unfairly affect your credit profile.
Sign up for a free credit repair consultation if you’d like to learn more about how Lexington Law can help you correct any errors you find on your credit report.
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