Credit card debt is at an all-time high in the U.S. According to a 2018 study on credit cards by MagnifyMoney, the average American with a credit card has a balance of $6,348. And overall, Americans are carrying $687 billion in credit card debt from one month to the next.
With numbers like those, it’s likely that many people will die with at least some debt in their name. If you have credit cards, a mortgage, student loans, personal loans, medical bills and auto loans, will they just go away when you die? Or will your family be held responsible? That all depends.
What happens to your debt after death?
Untangling exactly what happens to debt after death is a little tricky. It depends on a number of factors, including:
- The type of debt
- Whether someone else is a co-signer or has joint ownership of the property securing the debt
- Whether the deceased lives in a community property state
- The laws of the state in which the person lived when they died
Despite the potential variations, according to Kristin N.G. Dzialo, an attorney and partner at the estate planning law firm Eckert Byrne LLC in Cambridge, Mass., some general concepts apply across the board.
“Debt is specific to the person and doesn’t die with them,” Dzialo said. “If someone co-signed the loan or was jointly or severally liable for the debt, then that other person may be 100% responsible for the debt when the other person passes away.”
Jointly and severally is a legal term that means two or more people are fully responsible for the debt. For example, if two people are jointly and severally liable for a mortgage and one dies, the other person becomes fully responsible for the mortgage debt; their liability isn’t limited to their half of the mortgage.
However, Dzialo noted, “if the debt is just in the decedent’s name alone, then no one else is technically responsible for the payment of that debt.”
But that doesn’t mean the debt just goes away — instead, it becomes the responsibility of the deceased person’s estate.
“If there are assets in the decedent’s estate to satisfy the debt then it should be paid,” said Dzialo. “However, whoever is handling the estate (a Personal Representative, Executor or Trustee) must verify that the debt was a legitimate debt of the decedent.”
What happens to credit cards, personal loans and medical bills?
Credit cards, personal loans, medical bills and utilities are unsecured debts — this means they’re not backed by an underlying asset. In most cases, if the estate does not have enough money to pay these debts, the creditor is out of luck. However, there are a few exceptions.
Someone else can be responsible for repaying these debts if:
- They co-signed the loan application
- They are the deceased person’s spouse in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin)
- They are the deceased person’s spouse, and state law requires the spouse to pay certain kinds of debts, such as medical bills
- They were legally responsible for resolving the estate and didn’t comply with the state’s probate laws
“In community property states, this is where it gets dicey,” said Beverly Harzog, a consumer finance analyst and credit card expert at U.S. News and World Report. Different states play by different rules, so it depends on the state and specific wording of the law. In community property states, it’s a good idea to talk to an attorney to make sure everything is handled properly.
What about mortgages, auto loans and student loan debt?
Mortgages and auto loans are of secured debts, meaning they are backed by collateral. Student loans are typically unsecured, but how they’re handled at death is a little different than other forms of unsecured debt.
When someone passes away with an outstanding mortgage, if there are no co-owners who are jointly and severally liable for the mortgage, no co-signers and the property is not located in a community property state, responsibility for paying off the mortgage won’t fall to anyone else. If nobody pays the mortgage, the bank will foreclose on the home.
However, a home is often one of the largest assets in an estate. If the home is worth more than the mortgage balance, the heirs of the deceased may want to work with the lender to resolve estate issues and avoid foreclosure.
Like a mortgage, an auto loan is secured by the vehicle itself. If there is no co-signer and the estate does not have enough money to pay off the auto loan and heirs do not want the vehicle, the lender can repossess the car to satisfy the debt. If heirs wish to keep the vehicle, they will need to pay off the loan balance.
Student loan debt
How student loan debt is handled at death depends on whether it’s a federal or private student loan.
Federal student loans are discharged once the loan servicer receives acceptable proof of death, such as an original death certificate, a certified copy of the death certificate, or a photocopy of one of those documents. This also applies to federal Parent PLUS loans if the parent or student on whose behalf the parent obtained the loan dies.
With private student loans, it’s a little trickier. Many issuers of private student loans will discharge the debt if the student dies; others won’t. If there is a co-signer on the loan, the co-signer may be responsible for the full balance.
The Economic Growth, Regulatory Relief, and Consumer Protection Act (S.2155), signed into law on May 24, 2018, provided some protections to student borrowers and co-signers. The law prohibits lenders from demanding the loan be paid in full when a co-signer dies and requires that a co-signer be released from their obligation within a reasonable timeframe after receiving notice of the borrower’s death. However, these rules take effect for new private student loans after Nov. 18, 2018, and do not apply retroactively, according to the National Association of Federally-Insured Credit Unions. So co-signers may still be on the hook for private student loans taken out before that date.
4 cases when someone might have to repay your debt
As we mentioned above, there are some cases in which someone else may have to repay your debt. Let’s look at those in more detail.
1. When you have a cosigner
If anyone has co-signed for a loan, they can be held responsible for the remaining debt when you die. This can include:
- Private student loans taken out before Nov. 18, 2018
- Auto loans
- Credit cards
- Personal loans
- Line of credit
Note that the responsibility for repayment doesn’t apply to authorized users on a credit card. However, when the account owner dies, an authorized user must stop using the card. If they continue making new purchases after the account owner dies, they can become responsible for the entire balance, not just the amount charged after death.
2. When you live in a community property state
If you’re married and you live in a community property state, your spouse may be responsible for paying off the debt with community assets, like savings accounts, investments and physical assets.
Whether you live in one of the nine community property states or not, it’s a good idea to talk to an attorney if you are worried about leaving your spouse with debts they can’t afford to repay. “Some states aren’t community property states but act like it in certain areas,” said Harzog.
3. State law requires the family members to pay certain kinds of debt
Paying medical bills is typically the responsibility of the deceased person’s estate if the estate has enough assets to cover the debt, but some states have laws that make spouses or adult children responsible for paying their parent’s medical bills if the parent can’t pay and doesn’t qualify for Medicare.
However, these laws aren’t always enforced, and they may take the family member’s ability to pay into account. Again, if you’re concerned about burdening your family with medical debt after you die, talk to an attorney familiar with the laws in your state.
4. When the legally responsible person doesn’t comply with state probate laws
When a family member passes away, responsibility for preserving assets, paying debts and distributing the remaining assets to the heirs falls to a Personal Representative. That Personal Representative may be an executor named in the will or an administrator appointed by the court.
If the Personal Representative doesn’t comply with state law, they may become personally responsible for the estate’s unpaid debts. Examples include failing to pay estate taxes, making bad investments or giving assets away before creditors are paid.
3 ways to prep your finances in case of death
If you are worried about leaving a tangled net of debts to your family members when you die, there are steps you can take to ensure your finances are neatly tied up.
1. Have a will
“It’s important to have a will and have your affairs in order,” said Harzog. “Do this while you’re young. You’ll update throughout your life as things change, you get married and have kids, but stay on top of this.”
2. Minimize the debt you carry
Of course, the best way to ensure you aren’t leaving debts for your heirs to deal with is to stay out of debt in the first place.
“Pay your credit cards in full and on time,” said Harzog. “It’s hard enough on survivors without leaving debt behind.”
3. Organize your finances
If you died today, would anyone know what assets and debts you have? Where you bank or how to access your accounts and safety deposit box? Whether you have life insurance? Too often, family members have to spend hours sorting through paperwork trying to figure these things out.
For that reason, many experts recommend maintaining a financial information binder. This binder might include:
- Account numbers and contact information for bank, brokerage and retirement accounts
- Copies of your will, power of attorney or other legal and estate planning documents
- Contact information for family members
- Copies of loan statements, tax returns and other financial information
- Copies of policies for auto, homeowners/renters, health, life, disability and long-term care insurance
- An inventory of physical assets including jewelry, artwork, antiques and other valuables
- Copies of birth certificates and other personal records
- Copies of real estate deeds and titles to vehicles or boats
- Statements for other retirement assets, such as pension benefits statements
The binder can be kept in a safe deposit box or fireproof box at home. Just make sure someone knows how to locate it in the event of your death.
Debt after death: FAQs
Coping with the death of a loved one is difficult enough without the added pressure of collection calls from creditors. Here are more questions and answers about what happens to debt after someone dies.
Your family may get calls from debt collectors after your death, even if your family has no obligation to pay off the debts you’ve accumulated.
“If the family member is not in a community property state and not a co-signer, they should let the debt collector know the person is deceased and they’re not liable,” Harzog noted. “If they keep calling you, get an attorney. Some people will pay just to make them go away, but you shouldn’t have to do that if you’re not responsible.”
When someone dies, creditors have a certain period of time to make a claim against the estate. That period of time varies from state to state.
In most states, the executor must post a notice to creditors in the newspaper shortly. The executor may also be required to send written notice to any known creditors. After receiving the notice, the creditors have anywhere from a couple months to a couple years to make their claim.
Again, it’s a good idea to talk to an attorney in your state to see how the law applies where you live.
When you pass away, the Personal Representative of your estate is tasked with selling assets to pay off debts before distributing any remaining assets to heirs — but not all assets are up for grabs. Life insurance and money in retirement accounts, such as 401(k)s and IRAs, with named beneficiaries can be transferred to beneficiaries without going through probate.
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