What Happens to Debt When You Die
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The key determinant in what happens to your debt when you die is whether anyone else shares responsibility for a specific debt. In general, your estate – the sum of your assets – will be used to pay off your outstanding debts. However, anyone with whom you shared a debt, such as a spouse who took out a mortgage with you or a parent who cosigned on a car loan, will become personally responsible for that debt.
|What happens to debt when you die?|
|Type of debt||What happens|
|Home equity loans||
What happens to debt when you die: 3 things to know
1. Your estate is responsible for settling debts
Probate is the process in which your will is recognized and an executor or personal representative is appointed to handle your estate, including settling any debts and distributing any inheritances. The types of debt you have, who shares that debt with you and a variety of state laws will determine what debts are forgiven at death and what must be repaid.
Many states have simplified probate in recent years. But the executor must follow a formal, legal process, which varies depending on the state in which you live. Each state has its own laws regarding the validity of wills, the distribution of assets if a will doesn’t exist and other matters.
Dying without a will, or dying “intestate,” means your assets will be distributed according to your state laws. For certain assets, such as real estate, the location of the real estate – not your state of residence – will apply. In general, states require that in the absence of a will, estate proceeds go to spouses, children, parents or other relatives. If someone dies without a will and no relatives can be identified, the entire estate goes to the state.
When your estate is not large enough to cover all of the debts that belong to you exclusively, they will go unpaid. With a few exceptions, such as spousal obligations, family members are not responsible for any debts that were borrowed solely in your name.
2. Your estate pays off secured debts first
All debts are classified as secured or unsecured, depending on whether or not they are backed by collateral. Lenders take a risk in extending credit, and they may reduce that risk by securing a loan with collateral, an asset that the lender gets to collect if the borrower defaults.
|Common types of secured debt|
|Auto loan||The vehicle purchased|
|Home equity loan||Your home|
|Secured personal loan||Your vehicle or savings in a bank account|
|Car title loan||Your vehicle|
Unsecured debts include credit cards, traditional personal loans, student loans and medical bills, among others.
In probate, secured debts are paid before unsecured debt. When an estate doesn’t have enough assets to cover all of its debt, the collateral for secured debt may revert to the lender, whereas lenders of unsecured debt may not get anything.
3. Your spouse can be on the hook depending on where you live
States vary in how they treat a person’s responsibility for debt after a spouse’s death. Most follow the common law model, in which a spouse is only responsible for shared debt and assets. That means assets remain separate unless they are put into both spouses’ names.
In community property states, however, couples share ownership of all debt acquired during the marriage. Community property states include:
- New Mexico
In Alaska, spouses may opt to share some or all assets based on the community property model.
Debt after death: Breakdown by debt type
Your estate will pay your credit card debt after death if the credit is in your name only. If you share a credit card with another person, such as a spouse, he or she will continue to be responsible for the account. Note, however, that this applies only to a joint account holder, not to someone who is an authorized user.
Your mortgage may be one of the executor’s biggest financial concerns, and rightly so. A lender may pursue a foreclosure if payments aren’t met. Often, a mortgage is jointly held by a couple, in which case the surviving spouse continues to be responsible. When surviving spouses aren’t on the mortgage, they may choose to refinance the mortgage in their own name.
When parents or children die with a mortgage, the estate becomes responsible for the debt – either by selling the home to repay it, with any equity going to estate heirs, or by allowing the lender to foreclose.
Home equity loans
Home equity loans, or second mortgages, represent money borrowed against the equity you have built up in your home. Like a mortgage, they are paid by your estate if held by you alone, and they are considered shared debt if you borrowed them with a spouse or someone else. Your estate will satisfy your original mortgage first, followed by the home equity loan.
If the house is going to an heir, a lender may agree to let the heir assume monthly payments for the home equity loan. But that’s not a given. Some lenders may want the equity loan satisfied in full during probate.
Medical debt after death must be paid by your estate, and in many states, medical bills take priority over other unsecured debt in the repayment order. Family members could be responsible for your medical bills after death if they signed an agreement to that effect with the health care provider, a request that hospitals sometimes make when care is expected to be costly.
If you share an auto loan with someone else, or if someone cosigned on your loan, that person becomes responsible for the loan if you die. If you financed a vehicle solely in your name, your estate is responsible for the debt.
To avoid having the lender repossess the vehicle for lack of payment, your estate should repay the debt either by returning the vehicle to the lender or by selling the vehicle and using the proceeds to repay the loan.
What happens to your student loans when you die depends on whether they are federal or private loans.
Federal student loans, including Direct PLUS loans, are forgiven when a borrower dies, once the loan servicer receives documentation of the death. This loan forgiveness may count as taxable income for which the estate will be responsible.
Private student loans, on the other hand, usually must be repaid. A few private lenders forgive student loans after death, but the benefit isn’t a given. Be aware, too, that when there’s a cosigner, some private lenders will want the loan repaid right away.
Your estate is responsible for any personal loans you acquired solely in your name, whereas any loans you borrowed with someone else will become that person’s responsibility. Personal loans are unsecured, which means that your estate will repay them only after any secured debts have been satisfied.
FAQ: Debt after death
Are beneficiaries responsible for debts left by the deceased?
Beneficiaries are only responsible for the debts of a deceased person when they already shared the debt obligation – for example, as a cosigner on a loan. Otherwise, the person’s estate, rather than any survivors, must pay off the debt.
All assets, together with their associated responsibilities, become part of your estate. If beneficiaries receive an inheritance they don’t want, such as a real estate timeshare, they may be able to avoid that debt by filing a legal disclaimer refusing that specific gift – an option that should be carefully researched and handled in a timely manner.
Who notifies creditors and credit bureaus when you die?
States require executors to notify creditors, but the processes vary. The notice may consist of a notice published in a newspaper, for example, or an official form mailed to creditors. The U.S. Social Security Administration may notify the three major credit bureaus (Equifax, Experian and TransUnion), but it may be faster for the executor to do so.
An executor may choose to notify certain creditors directly, such as credit card companies and mortgage lenders, as a precautionary measure against credit card fraud and identity theft and to find out what the lender will require during probate.
Can debt collectors contact your spouse after you die?
The Fair Debt Collection Practices Act (FDCPA) permits debt collectors to contact a spouse, a parent of a minor child, a guardian or an executor and to contact other relatives for the purpose of obtaining contact information for one of those four people.
However, the FDCPA limits what collectors can and cannot do in their attempts to collect a debt. Your spouse has the right to tell a collector to stop contacting him or her, with a few caveats: The request must be in writing, and the request won’t relieve your spouse of the debt – that still stands.
Can creditors take life insurance benefits or retirement accounts?
Creditors’ ability to put a claim on life insurance and retirement benefits depends on whether or not they become part of your estate, and that depends on whether you designate beneficiaries.
To ensure that beneficiaries receive life insurance proceeds or retirement accounts, you must designate them as such; otherwise, the money flows to your estate, where it may be used to pay creditors. In some cases, you may want insurance proceeds to become part of your estate for the purpose of paying debt.
Are there statutes of limitations on debt after death?
The statute of limitations on debt after death, which determines how long creditors have to file a claim against an estate, vary by state. In North Carolina, for example, executors must publish a newspaper notice to creditors, which starts the clock on a three-month statute of limitations. In California, the executor is required to mail a Notice of Administration to all known creditors, who then must file a claim within four months.
While discussions about death can be uncomfortable, discussing your financial situation with loved ones could help to alleviate concerns and to eliminate surprises. That can be especially important if you share debt with anyone, such as a cosigner. A financial advisor or an estate planning attorney can also provide valuable guidance.