When someone dies with debt on their head, one of the major questions that their loved ones ask is, "What debts are forgiven at death?” Unfortunately, we can’t give you a clear-cut answer to this question because it involves the evaluation of various factors. They include the type of debt incurred, the presence of collateral, the people left behind, and, of course, the estate of the deceased.
In this guide, we will help you find out what happens to debt after you die.
How Debt Is Handled After Death
Sadly, your debts do not die with you. Unless you have made provisions to have your debts covered, they will remain to haunt your loved ones after your passing. Some of the debts of the deceased can become a liability on your estate. The estate is the collective property, assets, possessions, and money of a person.
Usually, there is a certain window of time after a person dies before the probate begins. Probate is a legal process of paying off the deceased's debt and distributing the remaining assets among the heirs.
However, what happens when the estate does not have enough assets to pay off the debt? Does debt pass to next of kin? Some of the debts are paid off in priority order, and others may likely be written off. There are also situations when your loved ones have to bear the burden of your debt.
Who Pays Your Debt When You Die?
Although the surviving relatives are often not responsible for the deceased person’s debt, there are some people who may be liable to pay it off. These include:
- Cosigners on a loan or line of credit
- Your spouse — depending on the state you live in. Texas, California, Washington, Nevada, Arizona, Idaho, Louisiana, New Mexico, and Wisconsin are community property states that hold spouses responsible for unpaid debts after marriage.
- Joint property owners or account holders
- People assigned to settle the estate’s debt who did not comply with the probate process
Types of Debt Your Loved Ones May Have to Repay
Before paying off any debts, you will be first allowed to cover the funeral costs and the expenses related to the running of the estate. You can then use the estate to pay off debts.
It is important to find out what kind of debts the deceased has incurred and if there is a guarantor or insurance for those debts. If there is a surviving guarantor, the debt is paid by them and not the estate. Moreover, certain life insurance policies also cover the deceased person’s debt.
Depending on the debt type, you can use different ways to pay them off. The following is the priority in which the debts are paid:
- Secured debts
- Priority debts like taxes
- Unsecured debts like credit cards, student debts, and utility bills
If the estate does not have enough money to pay off all the debts, it is declared “insolvent.” In this case, the most important debts are paid off first, including:
What Happens to Mortgage Debt
Probably that’s not the first question that comes to your mind when you lose someone. However, you should be aware of what happens to a mortgage when someone dies.
When a person buys a home through a loan, that money is secured by a lien against the property. In case the homeowner dies, this debt needs to be paid off. If there is a spouse left behind, she or he can take over the payments.
However, if the debt is not being paid, the lender has the right to repossess the home. Usually, the property will not be foreclosed immediately. The family members may be given some time to take over the ownership of the house and pay off the remaining mortgage.
Once the home is in possession of the heirs, they can choose to sell it to repay the debt while continuing to make payments until the house is sold. Alternatively, they can opt to keep the property and take over the mortgage payments.
Note that lenders may request proof of the new owner’s financial ability to pay the mortgage and may even demand immediate debt repayment in some cases. Fortunately, family members are exempted from these rules, so they can easily claim their family home.
Obligations of Cosigners and Joint Owners
Cosigners on a mortgage are directly liable for the deceased's debt. If there is no cosigner, the heirs have to deal with transferring the mortgage after the death of the homeowner. However, as we mentioned above, that does not mean the heirs get the house clear and free. They need to pay off the debt if they want to keep it.
Joint owners named on the deed may not necessarily be cosigners and are not automatically responsible for the payments. However, again, they can take over the debt if they want to avoid property foreclosure.
Mortgage Insurance
You can use mortgage protection insurance to pay off the mortgage after the death of the owner; however, it might be expensive. Contact your financial advisor to know whether this option is suitable for you.
What Happens to Credit Card Debt
Does credit card debt die with you? The quick answer is yes since the card owner is solely responsible for the liabilities. Credit card debt is an unsecured debt. To pay it off, the credit card company has to make a claim against the deceased’s estate.
If there is no or not enough estate to pay the credit card debt after the death of the card owner, the credit card company will have no choice but to write off the loan. There will be no legal obligations on the surviving relatives to pay the balance unless they’re joint account holders. Joint account owners may have to settle the unpaid bills since they are equally responsible for the loan.
What about the obligations of the authorized user on a credit card after the death of the card owner? Since authorized users do not hold ownership of the account, they are not responsible for the debt.
And what happens to credit card debt after the death of a spouse? In community property states, credit card debt is transferred to the surviving husband or wife.
What Happens to Student Loan Debt
A student can take out either a federal student loan or a private student loan. Federal student loans are more consumer-friendly than private ones, with their own policies.
Federal Student Loan Debt
If a student takes out a federal student loan and passes away before clearing the balance, his or her family can apply for a loan discharge. Discharge of student loan debt after the death of the student applies to all direct federal loans. In case a parent has taken out a PLUS loan on behalf of their undergraduate children, the loan is wiped out if the parent or the student dies.
Private Student Loan Debt
Now, what happens to private student loans when you die? Private student loans come with more complicated regulations, and their discharge rules vary from lender to lender. While some lenders, like Sallie Mae, Wells Fargo, and RISLA, may consider student loan forgiveness in the event of a student’s death, others may not. In this case, the deceased person’s estate will be used to repay the loan.
Since a private student loan is a form of unsecured debt, if the estate does not have enough money to recoup the cost, creditors will have no choice but to write it off as a bad debt.
Cosigners of private student loans taken out before 2018 are liable to pay the balance in case the primary borrower passes away. However, from 2018, lenders must release cosigners from the liability of fulfilling the debt. In case the cosigner dies, the primary borrower has to continue making payments.
What Happens to Car Loan Debt
Car loans are also paid out of the deceased person’s estate. Since a car loan is a secured debt, the lender has the right to repossess the vehicle if the payment is not made on time.
If a person dies when he or she still has an unpaid balance on the car, the heirs have a few options:
- They can take ownership of the vehicle and continue to make payments after assuming a car loan after death.
- They can sell the car to pay off the remaining balance to the lender.
- They can let the lender repossess the vehicle if they don’t want it.
It should be noted that if the heirs want to pay off the car loan, they will need to be qualified as “a borrower” to maintain the terms and conditions of the loan. Alternatively, they may need to apply for an entirely new loan. However, if there is a co-borrower on the car loan, they will be liable for the remaining amount.
What Happens to Medical Debt
Medical bills are another type of debt that does not go away when a person dies. The healthcare provider or the collectors will need to decide how to recover the money. In some cases, the healthcare provider may declare the loan uncollectible and close the deceased person’s account if the debt is small enough. However, if you owe a lot of money, medical debt is paid out from your estate.
What Creditors Can and Can’t Take
After covering the topic “What debts are forgiven at death?” let’s determine what creditors can and can’t take.
Creditors may claim debt through your estate and seize all your assets: your house, vehicles, jewelry, valuable family heirlooms, and financial securities like stocks, bonds, and savings. But there are certain assets that they cannot go after, such as your living trusts, retirement accounts, and life insurance benefits. That’s because these assets go directly to the beneficiaries after your death and are not part of the probate process.
Aside from these, almost everything else can be taken away to settle the debt, and there is not much your family can do about it. When estate planning, some people decide to create an irrevocable trust, which contains assets that are safe from creditors. However, this trust cannot be broken, and you cannot exchange these assets for money if you change your mind in the future.
A life insurance policy can be a good way to help your family cover debts and help them out financially once you pass away. But keep in mind that the death benefit will pass to your estate if your life insurance beneficiaries are no longer living. In this case, the creditors can use it to get repayment. Therefore, it is essential to always keep the beneficiary information in your life insurance policy updated.
What Happens if You Die Without Any Estate?
In case of dying with debt and no assets, no person in your family will inherit your debts, except for a spouse in community property states. If your estate has some money, but it is inadequate to fulfill all of the debt, then mortgage, secured loans, and funeral expenses will be given priority, and these liabilities will be paid off first. If the asset is declared "insolvent" or does not have enough money to foot the bill, the lenders will have to reconcile themselves to a loss.
Keep in mind that your estate can be used to fulfill the debts of the deceased. Hence, before distributing the deceased’s assets to the heirs, the executor of the estate has to check that all the debts are paid off. If there is not enough cash available, some assets might be sold to generate the money. For example, in some cases, the house might have to be sold to satisfy the mortgage, car, credit card, and other debts. However, it’s up to the state court to make the exact decision on the matter.
In Conclusion
So, “What debts are forgiven at death?” As you’ve learned from our article, most debts cannot be forgiven. In case of death, the deceased’s estate is used to pay off the debt. However, if the person has an insufficient estate or no estate at all, the creditors will have no choice but to write off the debt.
Federal student loan debts are wiped off in case the borrower or the parent of the borrower dies. As for the private student loan debts, some of them may also be forgiven depending upon the specific lender.
In some cases, your loved ones like your spouse, children, or people who are joint owners of your account may have to bear the burden of your debt after you die. That is why it is prudent to safeguard yourself by insurance policies so that you don’t have to leave your family paying debts after your death.
