What happens to your debt when you die? Are loved ones responsible?

Just because a person dies doesn’t mean all of their debts disappear — here’s what families need to know about their liability.

May 14, 2024 - 02:30

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What happens to your debt when you die? Are loved ones responsible?

Inflation has made everything more expensive — even death. And while a life insurance policy can offer lump-sum payments to beneficiaries that can help cover funeral and other final expenses, your family might still be liable for some of your debts after you’re gone.

According to Experian, in 2023, the average American owed $104,215 in mortgage debt, auto loan debt, credit card debt, and other personal loans. While some, but not all, of these debts are canceled when a person dies, it’s important to understand just what happens to your debts when you pass away — and who’s responsible from that point on.

Do your debts die with you? The probate process explained

A person’s assets, which are the sum of their financial accounts and possessions, including property, are known as their estate. You don’t have to be a millionaire to have an estate; legally speaking, everyone has one, even if they don’t have many assets, or none at all. However, your estate is the first thing creditors go after to collect money that’s due to them.

The probate process is the legal process of distributing a person’s estate. Depending on the state you live in, it could begin as soon as a few weeks after a person’s death, like in Massachusetts. In other states, such as California, the process could take between eight months and several years.

An executor is the person designated to carry out the instructions listed in a person’s will. But before the executor can dole out inheritances, they must first pay taxes and settle the deceased person’s debts. If the amount of debt outweighs the estate, they may have to sell off certain assets as collateral, while other debts might simply go unpaid.

Which debts are forgiven when you die?

It’s important to understand which category the deceased person’s debts are in:

Secured debt is a loan that is backed by collateral. These include mortgages and auto loans. This type of debt typically comes with a lower interest rate because it is less risky than unsecured debt because if the borrower is unable to pay their loan, the collateral can be repossessed. For these reasons, secured debts are not typically forgiven.
Unsecured debt, on the other hand, is not collateralized. If there isn’t enough money in an estate to cover these debts, they often go unpaid. Credit card bills, medical bills, student loans, and utility bills are all examples of unsecured debts.

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Who is responsible for unpaid debts?

According to the Consumer Financial Protection Bureau (CFPB), a federal agency established to ensure that banks, lenders, and other financial companies treat their customers fairly, there are certain conditions under which families are responsible for a deceased person’s debts.

It all boils down to where the deceased lived and whether they shared legal responsibility for their debts:

In certain states, surviving spouses are responsible for paying the debts of a deceased person using jointly held property. These states are known as community property states, and they include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
A co-signer on a loan with the deceased is liable for the outstanding balance. The contract will state what happens in the event the borrower dies before the loan is repaid in full. (That’s why it’s important to read and understand the entirety of any contracts before you sign on.)
If a person holds a joint credit card account with the deceased, they are also responsible for repaying the outstanding balance.

What happens to your medical bills when you die?

Medical bills are among the first debts to be paid from the deceased’s estate. They could also be covered by an insurance policy. In cases where the estate is insolvent, or there aren’t enough assets to cover the debts, a probate court may prioritize payments or even write them off since they are unsecured debts.

What happens to your credit card bills when you die?

Credit card companies will make a claim to be paid for outstanding balances through your estate. But if you don’t have enough assets to pay these bills, they will also go unpaid, since they are unsecured.

It’s important to note that while authorized users on credit card accounts have no financial responsibility for any outstanding debt, a joint owner of a credit card account is financially obligated to pay any remaining balance.

What happens to your student loan debt when you die?

According to the federal student loan website, if a borrower dies, their federal student loans are forgiven. In addition, if a parent or guardian took out a PLUS loan on the student’s behalf, that loan will also be forgiven. A death certificate (or a certified copy or accurate photocopy) must be submitted as proof.

However, borrowers with private student loans are not so lucky. These loans are not discharged upon death, although assets from your estate can be used to pay them off.

What happens to your mortgage when you die?

If you cosigned a mortgage, the other borrower is responsible for continuing to repay the loan. After all, a home is owned by the mortgage lender until the borrowers pay off their loan.

If you bequeath a home in your will, your heirs must assume payments on the mortgage. A mortgage lender may be willing to refinance the mortgage if making payments proves difficult; if any of the parties default, the mortgage lender could initiate foreclosure proceedings.

For single borrowers who do not list inheritors, your bank will sell your house to recover the outstanding loan amount.

What to do if a debt collector contacts you about a deceased loved one’s debts

The Federal Trade Commission (FTC) explains what debt collectors can — and cannot — do to family members of deceased relatives with outstanding debts. Check their website to learn your rights and how to report any issues you’ve encountered. They also provide information on how to receive free legal services from a lawyer near you.