What Happens To Your Debt After You Die? 

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A recent Northwestern Mutual and the Harris Poll survey revealed that the average American carries $21,800 in personal debt (excluding mortgages), with younger generations facing a particularly heavy burden due to student loans. The survey also found that nearly half (49%) of respondents believe they can settle their debts within one to five years, while a significant portion (39%) anticipates a longer struggle, potentially lasting a lifetime. But what happens to this debt if someone dies without paying it all off?

Credit card debt 

According to a survey, a significant portion of Americans, roughly 40%, have been grappling with credit card debt for over five years. The findings also reveal a broader trend – nearly half (47%) of Americans haven’t been credit card debt-free in the past five years (2018-2022). 

So, what happens to credit card debt after someone’s gone? Credit card debt is unsecured, meaning that it’s not tied to a specific asset, like your car or house. So, when you pass away, the responsibility to pay it off falls to your estate – the assets and money you leave behind.

Assets on the line

If your estate doesn’t have any assets to cover the debt, the credit card company eats the loss. However, if you do have assets, such as a savings account or a jointly owned car, your creditors can go after those to collect what you owe. This includes any joint credit card accounts you might have.

Selling assets to settle debts

The person you appoint as the executor of your estate (the person who handles your financial affairs after you die) will have the unenviable task of deciding what assets to sell to pay off your debts. In some states, there are even laws that require executors to use jointly owned property (like a house you shared with your spouse) to pay off your outstanding debts.

Joint accounts and authorized users

A spouse is responsible for the debt on a jointly held credit card account after the death of the other spouse. An authorized user on a credit card account is not responsible for the debt after the death of the primary cardholder.

In other words, if you and your spouse have a credit card together (joint account), then whoever survives is responsible for the debt. On the other hand, if your child is just an authorized user on your credit card, they won’t be on the hook for the debt if you pass away.

Student loans

Student loans can feel like a heavy weight on your shoulders. A recent Federal Reserve report showed a staggering number: 43.5 million Americans owed a whopping $1.7 trillion in student loans at the start of 2023. That’s 13% of the population carrying an average debt of $37,787 each. 

What happens to this burden if you pass away?

There’s a key difference between federal and private loans in this situation. Federal student loans are typically discharged (canceled) upon the borrower’s death. That means you wouldn’t leave this debt for loved ones to deal with.

Private loans, however, are a different story…

It’s important to check your loan agreement for details on “death discharge.” This clarifies whether the loan gets forgiven upon your passing. If there’s no death discharge clause, your lender could try to collect from your estate (the assets and money you leave behind).

Student loans might not die with you

Because student loans are unsecured (no house or car on the line as collateral), things can get trickier. This is especially true in community-property states like Arizona or California. In those states, your spouse’s assets might be considered fair game for the lender to go after if they need to collect the debt. This could potentially leave your family responsible for your student loans after your death.

Car Loans

Car loans are secured loans that are tied to a specific asset – the car itself. If you die and the loan isn’t paid off, the lender can repossess the car to get their money back. This might even be a welcome option for some families who don’t necessarily need or want the car.

However, unlike some other debts, auto loan debt doesn’t automatically become a claim against your estate. Most auto loan agreements have “death clauses” that outline what happens in this situation. These clauses typically address repayment, responsibility, and even loan terms.

Co-signer vs no co-signer

If you have a co-signer on the loan, they become responsible for the remaining balance if you pass away. On the other hand, if there’s no co-signer, the decision falls to your estate. 

Community property and car loans

The car might need to be refinanced depending on the loan terms. It’s important to check both your loan agreement and your state’s laws, especially if you live in a community-property state. In those states, your surviving spouse could be responsible for the loan even if they weren’t a co-signer.

Mortgages

Mortgages are secured debt, which means they’re tied to a specific asset – your house. If you can’t pay your mortgage, the lender has the right to sell your house to get their money back.

Here’s the thing: secured debt like mortgages gets priority over unsecured debts (credit cards, etc.) when it comes to repayment after death or bankruptcy. In other words, if your estate doesn’t have enough cash to cover everything you owe, the mortgage lender gets paid first. This increases their chances of getting their money back compared to unsecured lenders.

Inheriting a mortgaged home

Things can get complicated with joint ownership. Even if someone jointly owns your house but isn’t on the mortgage, they might still have to sell it to pay it off. Otherwise, they’d need to take over the mortgage payments themselves. If they can’t do either, the lender could foreclose.

Estate’s responsibility

Leaving your house to someone in your will also comes with a responsibility. If your estate can’t cover the remaining mortgage balance, the inheritor becomes responsible for future payments. Based on their financial circumstances, they may eventually find it necessary to sell the house regardless.

Medical Bills

Typically, medical debt is the first in line when it comes to debts your estate needs to pay. While specific laws vary by state, medical bills generally get high priority after you die. This means your estate’s assets, like your house, could be used to repay any Medicaid you received. Unfortunately, due to the high cost of medical care, the estate might not be able to cover everything.

Some medical debt might be forgiven upon your death, but there are exceptions that could leave your family on the hook.  

Community property and medical debt 

In community-property states, co-signers and spouses could be responsible for the remaining balance. Filial responsibility laws, present in 30 states, can also hold adult children financially responsible for their parents’ unpaid medical bills, even if they weren’t co-signers. 

These laws are based on the idea that children have a duty to support their parents financially. The enforcement of these laws varies widely by state, with some states rarely enforcing them and others being very aggressive.

The importance of state-specific planning

It’s important to note that the exact way medical debt is handled after death depends on your state’s laws.  If you’re concerned about this, it’s a good idea to talk to an estate planning attorney in your state.

How to protect your heirs?

Life insurance can be a lifesaver for your family after you’re gone. Unlike other assets that might be taken away by creditors, life insurance benefits go directly to your beneficiaries. This money is theirs to use however they see fit. A large enough payout could even help them cover things like your mortgage or other outstanding loans. This financial cushion can ensure your family keeps a roof over their heads and maintains a sense of normalcy during a difficult time. 

Shopping for life insurance

When shopping for a life insurance policy, it’s wise to compare quotes from different providers. This way, you can get a feel for the available coverage options, costs, and the best policy for your specific needs.