What Happens to Your Debt When You Die?

Chances are high that when you pass away, you’ll have at least some debt in your name. Some of that debt can be forgiven, while other accounts will transfer to your loved ones. In order to avoid passing along a financial burden after death, it’s important to understand which type of debt will outlive you and which steps you can take to minimize its effect. We’ve compiled a brief overview of the topic here; if you need reminding about some of the more complex terminology, we’ve also included a glossary below.

Which Debt Is Forgiven After Death?

In most cases, debt will be forgiven when there is no co-signer and no collateral. For example: 

• Some Medical Debt: Typically, medical bills are only charged to the patient and therefore cannot become anyone else’s responsibility. The only costs your spouse might be asked to pay are those associated with your final hospital stay.
• Federal Student Loans: According to the U.S. Department of Education, these will be discharged as soon as your death certificate is provided to the loan servicer. 
• Certain Personal Loans: If there are no co-signers, the executor will pay for these using estate funds. If the estate is insolvent (meaning there’s not enough money to cover all costs), the lender typically absorbs the debt.

There are a few exceptions to these rules. For one, residents in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) may be required to adopt a spouse’s medical debt or personal loans. If you’re concerned about passing along a hefty debt, check your state’s laws or consult with a financial expert.

Which Debt Is Passed On After Death?

When there is a co-signer and/or the lender still owns the property, payment on debts will still need to be completed even after your death. For example: 

• Mortgages: Your lender owns your house until you pay off your mortgage. This means that if payments stop, your loved ones could face foreclosure. They’ll have a few different options:
  • Continue making payments if there is a co-borrower already listed on the account
  • Assume the mortgage and continue payment
  • Sell the house, refinance, or use estate funds to pay off the mortgage
• Car Loans: Your vehicle will be added to your estate if you haven’t finished paying for it. Before anyone else can take the car, they’ll have to pay off your loan (they may take out their own loan to do so).
• Home Equity Loans: Like your mortgage, home equity loans have major collateral and will need to be paid off — especially if loved ones are still living in the house. They’ll need to quickly transfer the debt and continue making payments.
• Credit Cards:  What happens to credit card debt when you die depends on whether or not you had a co-signer. Because co-signers are equally responsible for an account, it remains their responsibility when you die.

How Can I Protect My Loved Ones From Debt?

If you’re shouldering more debt than you expected, don’t panic; there are steps you can take now to create a financial safety net for your loved ones should the worst happen. First, check that you correctly listed beneficiaries on retirement accounts. Throughout the process, keep all of your co-signers in the loop, pay down your car loan and mortgage as much as possible, and devise a plan with your loved ones about how best to pay them off.

Another surefire avenue of providing for your family after your death is to buy a life insurance policy. Term life insurance comes with inexpensive premiums (typically $10 to $30 per month) and covers you for a set period of time (say, when your child is in school). Whole life insurance is more expensive, but it guarantees a death benefit payment no matter what (as long as you continue paying premiums).

When selecting a life insurance policy, choose a death benefit that will give your loved ones the monetary cushion they need to get through the process of probate (you can calculate how much they’re going to need by using a life insurance calculator or speaking to a financial advisor). The security of a death benefit payment makes it simple for them to pay off your final debts, and it leaves enough for them to inherit a nest egg from you (rather than debt and a headache).

Glossary of Terms

• Asset — a resource that may be converted into cash (personal property, checking and savings accounts, stocks, etc.)
• Beneficiary — recipient of your choice for post-death financial benefits, usually listed on things like retirement accounts
• Co-Signer — someone who jointly applies for an account, equally responsible for managing the account and therefore liable for any debt incurred
• Creditor — another word for lender, the person or entity to whom money is owed
• Estate — the combination of all of your assets
• Executor — the person in charge of managing your estate after your death
• Probate — the process of managing the estate after death. This includes paying bills and distributing remaining assets to heirs.
• Solvent Estate — an estate that had enough money to pay off all debt. If there are insufficient funds, the estate is said to be insolvent.

What’s Next?

• Speak with a financial advisor about any outstanding debts and make a plan with co-signers and heirs about how to handle that debt in a worst-case scenario.
• Decide if you fall into the category of people who need life insurance.
• If you’re ready to create a financial safety net for your loved ones, get quotes from the best life insurance companies.