What Happens to My Debt if I Pass Away

Death and debt are two of the less pleasant subjects known to man, and ironically, the two often go together. In fact, according to a study conducted by Experian, 73 percent of American consumers owed outstanding debt averaging almost $62,000 when their deaths were reported during the month of December 2016.

To put that figure into context, most of this average debt level was mortgage-related, as the average amount owed by the deceased excluding home loans came in at $12,875. However, mortgage debt is actually only the second most common form of debt left behind when an individual dies – credit card debt takes the top spot, with 68% of those dying with debt owing some amount of credit card debt.

Mortgage debt does come in next at 37%, followed by auto loans (25%), personal loans (12%) and student loans (6%). So, what happens to all of this debt when someone dies? Let’s take a closer look.

When a person dies with debt, most of the outstanding debt becomes the responsibility of the estate of the deceased. Every estate has an executor, and it becomes the role of the executor to utilize assets from the estate to pay off debts.

This often involves writing checks from an estate bank account and can sometimes involve selling property from within the estate to pay off creditors who are still owed money, depending upon the type of debt involved. In the event that an estate does not include sufficient assets to pay back all existing debts, creditors will often lose out – although there are some possible instances when the responsibility of a deceased’s debt can land upon the shoulders of co-signors, joint account holders and surviving spouses.

However, these are specific circumstances that depend upon the type of debt involved and the geographical state in which the married couple resided. We’ll examine those possibilities in a moment – but for now, know that the general rule is that debts of the deceased become the responsibility of the estate when they can be sufficiently paid off by assets held within the estate. Let’s now consider varying types of debt and what happens with them when they remain unpaid upon the debtor’s death.

In the case of a mortgage, when there is a joint homeowner or someone inherits the house, the responsibility of paying the mortgage debt does fall upon the surviving homeowner or beneficiary.

Paying the monthly mortgage payment will suffice, as Federal law prohibits lenders from demanding full payment of the mortgage debt upon the debtor’s death. The executor can also make monthly payments out of the estate.

However, in the case of a home equity loan, when someone inherits the house, a lender can demand immediate and full repayment, which can sometimes result in a sale of the house. Still, some home equity lenders will work with beneficiaries and allow them to make the same monthly payments as the debtor had been making prior to dying.

In the case of credit card debt, assets from the estate are first utilized to pay off any outstanding debt. When there aren’t sufficient assets in the estate to do so, credit card companies are usually out of luck – since the debt is unsecured and not backed by any collateral.

However, surviving joint account holders will be held responsible for outstanding balances, since their name is still on the account and was on the account prior to the death of the other account holder.

Authorized users, however, are not held responsible for any balances. Additionally, a surviving spouse who is not a joint account holder can still be held responsible for credit card debt (as well as other debts) if the married couple resided in the following community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

In general, spouses can only be held responsible for debt incurred during the time of the marriage only (any debt pre-dating the marriage cannot become the responsibility of the surviving spouse) – although up to half of any community property from a marriage can still be allocated toward debt repayment.

In the case of auto loans, the executor can simply pay off the loan or continue making monthly payments via proceeds from the estate, or anyone who inherits the car can make monthly payments as well. However, if monthly payments are not paid, the lender can repossess the car, just as in typical circumstances.

With student loans, it will depend upon whether the loans taken were private student loans or Federal student loans. Federal student loans are discharged upon death. In the case of Federal PLUS student loans taken out by the student’s parent, these will be discharged upon the death of the student or the parent.

However, things are a little different with private student loans, which are not automatically discharged upon death. Private student loans become the responsibility of the estate, although lenders will lose out if the estate lacks sufficient assets to repay. Additionally, some private student loan lenders, such as Sallie Mae and Wells Fargo, do forgive student loan debt following the borrower’s death.

Co-signors of student loans remain on the hook however, as do surviving spouses residing within the community property states listed above, if the loan was taken out during the marriage.  

Life Insurance can serve as a good hedge to protect heirs from having assets in an estate eroded by the repayment of debt obligations that remain after death. Life insurance payouts are distributed directly to named beneficiaries, and they can ensure that spouses, co-signors and joint account holders will receive benefits that are separate from those that could be pursued by creditors following an individual’s death.

Life insurance payouts are often not taxable, as well. When using life insurance, it is important to keep your named beneficiaries current; in the event of the death of a named beneficiary, it becomes important to name a new beneficiary. This is because if this change is not performed, any eventual payouts will revert to the estate upon the death of the policyholder – and those assets can then become subject to creditors and debt repayment.

Steven Brachman is the lead content provider for UnitedSettlement.com. A graduate of the University of Michigan with a B.A. in Economics, Steven spent several years as a registered representative in the securities industry before moving on to equity research and trading. He is also an experienced test-prep professional and admissions consultant to aspiring graduate business school students. In his spare time, Steven enjoys writing, reading, travel, music and fantasy sports.

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