Debt Consolidation

What Happens To Debt When You Die?

As if a death in the family isn’t difficult enough, there are financial implications to consider whenever someone passes away. After all, not everyone has enough assets to cover their debts when they die. This is one of the reasons people buy life insurance; not only do they want to replace their income upon death, but they want to ensure money is left to cover their debts and final expenses.

Scott Reidenbach, an estate attorney and founding principal of Reidenbach & Associates, says that a formal process called probate handles debt and estate issues whenever someone dies.

“Probate is the court-supervised process through which their estate is distributed to heirs and debts owed to creditors are paid off,” he told LendingTree. Typically, a person’s will names an “executor” to handle their estate upon their death, and this is the person who represents the decedent during probate.

Unfortunately, family members can get stuck paying off debt left behind by the person who died in certain situations. At the end of the day, how debt is handled depends on how the debt was held, where you live and other factors.

Credit card debt

Personal loans

Mortgage debt

Home equity loans

Car loans

Student loans

When would someone be responsible for another person’s debt?

Handling debt collectors after a death

Use this script to handle debt collectors

How to handle overwhelming debt after death

Credit card debt

When it comes to lingering credit card debt, how it’s handled after death depends on how that debt was held.

If you’re a joint cardholder or co-applicant: Cleve Hill, a trust and estates attorney in the Atlanta area, says that in many situations, the surviving spouse is a co-applicant on the credit card, which makes them jointly responsible for the debt.

If the deceased spouse, adult child or other family member was the sole debtor on the account: That debt belongs to his or her estate. In that case, that debt would be subject to a “priority of claims” during the probate process. Hill notes that most states set up a priority of claims so they can dictate which debts are covered out of a decedent’s estate first when they die. While each state has their own set of rules, credit card debt and other unsecured debts are usually the last priority.

If the deceased has no assets: Equally important is the fact that, if somebody doesn’t have any assets, then their credit card debt will essentially go away. “The creditor may issue a forgiveness of debt to the estate,” said Hill. “But, if there are no assets to use to pay debts back, there is no consequence there.” Without any way to collect, the creditor typically eats this debt as one of the costs of doing business.

Is this type of debt transferable?

Credit card debt isn’t transferable unless it is jointly held. If two spouses or partners held a joint credit card, for example, then the surviving person would be left to handle the credit card debt on their own regardless of whether they racked up the debt or not.

Personal loans

Because personal loans are unsecured debts, they are treated similarly to credit card debt when someone dies.

If a personal loan is jointly held by two people, the surviving individual is responsible for the debt until it’s paid off.

If the decedent held a personal loan on their own without a cosigner, then the debt is the responsibility of their estate and is handled through probate. Like credit card debt, personal loan debt is typically prioritized toward the end of the probate process since it is unsecured and considered a lower priority.

Is this type of debt transferable?

Sometimes yes and sometimes no. If a personal loan was held by more than one person, then any surviving borrower would be responsible for paying it back. If it was held only by the individual who died, then the personal loan debt would become the responsibility of the estate.

Like credit card debt, personal loan debt typically goes away if someone dies without any assets, or if their assets aren’t enough to cover all their liabilities when they die.

Mortgage debt

Because mortgage debt is secured by a home, it is handled differently upon death.

If you were a co-applicant on the mortgage: Hill says that the most common scenario is one where a person carries a mortgage with a spouse. In that case, the surviving spouse would be jointly responsible for the mortgage and would need to continue making payments to keep the home.

If the deceased was the only account holder: If one spouse dies and they were the only one on the mortgage, on the other hand, the surviving spouse has a few options to consider. They could refinance the mortgage into their own name, for example. Hill also says he has seen a fair number of situations where the surviving spouse continues making mortgage payments on the home as if nothing ever happened. This strategy works fine as long as the surviving spouse is on the title of the home even if they’re not on the mortgage.

“Mortgage companies don’t really care who is paying the bill as long as it gets paid,” he said.

If an adult child or other family member leaves behind a mortgage, their estate is responsible for handling that debt. If the heirs (children or parents) don’t want to keep the property, they can consider selling the home and keeping the equity. If there’s no equity because the home is worth less than they can sell it for, they can also let the property fall into foreclosure.

When that happens, Hill says the lender has the right to seek a default judgment against the estate for the difference between the mortgage amount and how much the home is ultimately sold for.

Like other debts, however, there is nothing a mortgage company can do to collect on their losses if the decedent didn’t have any money or assets when they died. They can sell the home after foreclosure, but they may not get all their money back.

Is this type of debt transferable?

We already mentioned how a surviving spouse could refinance the mortgage in their name, but there are other ways mortgage debt can be transferred. For example, an heir who inherits the house and wants to keep the home can continue making payments on it regardless of whether or not the estate has any money left.

Home equity loans

Home equity loans are handled similarly to mortgage debt when someone dies since they are secured by a home or property. If a home equity loan was jointly held, the surviving borrower is responsible for paying it back. If a home equity loan was held by the decedent only, it needs to be repaid by the estate – either out of remaining assets or when the home is sold.

Is this type of debt transferable?

If someone inherits the home, there’s a possibility the lender will make the heir repay the home equity loan right away. However, lenders may be willing to work with the heir to allow them to pick up the monthly payments where the decedent left off.

Car loans

Car loans can be handled a few different ways, but it depends on how the loan is held. If a car loan is jointly held by two people, the survivor would get to keep the car and continue making payments. If the decedent was the only person on the car loan, however, the car loan would become the responsibility of the estate. If the estate doesn’t have the funds to cover the car loan, the car could be repossessed by the lender.

Is this type of debt transferable?

It can be. If a surviving heir wants to keep the car, they have the option to continue making payments on the existing car loan. However, heirs also have the option to refinance the car loan into their name.

Student loans

Private student loans typically die with the decedent when their estate doesn’t have money to cover them. The big exception is if private student loans were taken out with a cosigner. In that case, the parents or spouse (or any other cosigner) would become responsible for paying off student loan debt of the decedent.
Federal student loans, on the other hand, are discharged upon death. PLUS loans taken out by the parent will also be discharged upon death of either the parent or the student.

Is this type of debt transferable?

We already mentioned how cosigners on student loans become responsible for paying them back if the borrower dies. Add onto that the fact that, in community property states, any private student loans accrued during a marriage are the joint responsibility of both parties, and thus would need to be repaid by the surviving spouse.

When would someone be responsible for another person’s debt?

While the guidelines above explain what happens to most types of debt when someone dies, these general rules also apply:

Cosigned loan

“Cosigners are always going to be responsible for loans they cosign for – even if the debt wasn’t racked up by them,” said Hill. For this reason, consumers should think long and hard before agreeing to cosign on any type of loan or credit card.

Joint account holders

Joint account holders take out a debt together and should plan on paying it back together. In the event one account holder dies, the surviving account holder is still responsible.

Authorized users

“The account holder is responsible for the debt of authorized users whether they pass away or survive,” said Hill. If you add someone as an authorized user to your credit card, make sure you’re ready to pay off their debts and yours.

Spouses in community property states

Ji Y. Park, Esq., managing attorney at Park Family Law in Beverly Hills, Calif., says that many people don’t realize that all debts incurred during marriage in community property states like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin become the joint responsibility of both spouses. Because of this rule, even if the debt is incurred by one spouse alone, or is in the name of one spouse alone, it remains community property.

“People thinking of getting married should be careful about who they marry for this reason,” said Park. Married couples also should keep tabs on their spouse’s spending and debt habits in community property states if they want to avoid a nasty surprise later on.

State law

The Consumer Financial Protection Bureau (CFPB) notes that some survivors may be required to repay a deceased person’s debt if state law requires. An executor may also be required to repay a debt out of jointly-held assets by a deceased person and a surviving person if state law requires.

Handling debt collectors after a death

When someone dies and their estate isn’t enough to cover their debts, it’s important to keep a clear head. Hill says the executor assigned to handle the estate should be the one dealing with debt collectors and probate issues, and that they have a fiduciary duty to keep creditors informed.

“I tell my clients to be honest, open and forthcoming about the condition of the estate,” said Hill.

Also, don’t be afraid to try to negotiate if you’re working with limited assets but the estate has some cash to work with. “I’ve had some clients be successful negotiating debts down to a lower amount so they can get it paid and settled,” said Hill.

Provided you’re the executor charged with handling the estate, Reidenbach says you can start this process by calling the credit card or loan company and telling them about the situation.

If you are able to reach a settlement, you will want to get a letter from the creditor that says the debt has been satisfied so you have the agreement in writing.

If the estate truly doesn’t have any funds, then there’s not much to do.

“You can’t get blood from a stone,” said Reidenbach. “If a person dies without any money whatsoever or the value of their debts eclipses their estate, the creditors don’t get paid at all.”

Creditors may not be happy to hear that, however, and you may still receive calls from debt collectors even after you’ve told them there’s no money. Fortunately, the Fair Debt Collections Practices Act (FDCPA) offers consumers protection against debt collectors who take things too far. Under this rule, debt collectors are able to call between 8:00 a.m. and 9:00 p.m. in places that are convenient to you. However, they can’t call you at work if they know you aren’t allowed to receive debt-related communication there.

Debt collectors are also barred from harassing you or leading to believe you owe debts you aren’t responsible for.

Use this script to handle debt collectors

When a debt collector calls, the CFPB advises that you gather some information first. That information includes:

  • Personal information of the debt collector, including name, address and phone number
  • How much you owe, including any fees such as interest or collection costs
  • What the money was borrowed for
  • The name of the lender
  • Information on other people who may be responsible for this debt

Under the FDCPA, debt collectors who call must send this information to you in writing within 5 days of contacting you anyway. From that point on, keep all correspondence in writing so you can begin building a paper trail.

If money is available in the decedent’s estate to repay their debts, you’ll want to tell them they may be able to collect after probate is completed, along with dates they can expect to receive payment. If there is no money for a debt to be paid, consider using a variation of this script to bring collections calls to a halt:

Dear {insert company name},

I’m writing this letter in response to {insert debt collector’s name here}, who has been calling me on behalf of your company to collect a debt from {insert decedent’s name here}, who is now deceased. As I stated already, I have no obligation to repay this debt and the decedent’s estate has no money to repay this debt, either.

The Fair Debt Collection Practices Act (the “FDCPA”) grants me the right request that you validate this debt and prove I am responsible for repayment. In order to pursue this any further, you will need to document the amount you say I owe in addition to the date this debt was accrued by me. I also need evidence of the payment history of this debt.

After you provide this information, please cease all communication with me per the FDCPA guidelines. I am writing to let you know I no longer wish to communicate with you on this issue or any other. If you choose to continue communicating with me, I will seek legal options.

Signed, {insert your name here}

How to handle overwhelming debt after death

While you may not be responsible for a loved one’s debt after death in some cases, debts you are jointly responsible for will become your responsibility. If you are overwhelmed with debt while trying to grieve your lost loved one, here are a few solutions that could make debt easier to handle:

  • Debt consolidation loan – If the debts you’re struggling to repay are at high-interest rates, it can make sense to consolidate debt with a personal loan or a balance transfer credit card if you can secure a lower interest rate and better terms.
  • Sell items – If your loved one left you with debt but they also left behind assets, consider selling those assets to repay some of their debts.
  • Reduce spending –Remember that every dollar you don’t spend is a dollar you can use to get old debts out of your life. Consider cutting discretionary expenses like dining out and entertainment so you have extra money to pay down debt faster.

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