The average credit card balance in the U.S. is $5,313, and the average student loan balance is $38,792, according to Experian’s 2020 Consumer Credit Review. What happens to this debt if you die?
Some debt may outlive the person who signed up for it, but that doesn’t mean that loved ones are responsible for paying off the balance. If you have debt that you’re worried about passing on, or a loved one has died and you’re settling affairs, here’s what you need to know.
- Your estate repays your debt with some exceptions. If your loan or credit card has a co-signer or joint account holder, they may be responsible for repayment. If you live in a community property state, your spouse may be responsible for some of the debt.
- After the death of the student (or a parent in the case of Parent Plus loans), federal student loans can be discharged. Whether private student loans are discharged varies depending on the agreement.
- The death benefit on your life insurance should go directly to the beneficiary. If there is no valid beneficiary on the policy, money could get paid to the estate instead. Those funds may not be protected from creditors.
- If you have questions about estate planning, it may be worthwhile to hire a professional. They can help you put a plan in place that will secure your family’s future after your passing.
What Happens to Your Debt When You Die?
In general, money from a person’s estate goes toward paying off their debt, and surviving relatives aren’t personally liable, although there are some exceptions.
An estate is made up of money in accounts and other assets that are left behind when the person with that money dies. After the account holder passes away, the estate’s executor is tasked with settling affairs. This involves listing assets and known debts, distributing funds to creditors, and giving what’s left to heirs.
An executor is someone you choose to handle estate affairs once you pass away. You assign your executor in your will. If you have no will, an administrator could be assigned by the court to handle the job.
For debts that aren’t known, depending on where you live, the executor may be required to announce your passing in the newspaper. This announcement will request that people provide notice of unknown debts against you within a certain period of time. “If they don’t file notice during that period, then that debt’s too late; it’s lost. It’s essentially extinguished,” said Patrick Hicks, an estate planning attorney and head of legal for Trust & Will, an online estate planning firm.
How each debt is handled after you pass away depends on what type of debt it is. Here’s what you need to know about each one.
What happens to a home loan after you die depends largely on what happens to the house since the property secures it. If your mortgage has a co-signer or co-borrower, they may be responsible for the loan unless the home is sold.
If your home gets passed down to an heir, they could keep the home and take over payments or sell it to pay off the mortgage. Until the home is transferred to an heir, the mortgage payments could come from the estate. If no one takes over repayment, the home could go into foreclosure.
Home Equity Loans
A home-equity loan, often called a second mortgage, is an installment loan secured by your home. If there’s a co-signer on the loan, they could still be responsible for repayment. Otherwise, the loan could be paid off by the estate, or it could be paid off after an heir sells it.
Like other debt on this list, medical debt is typically paid using your assets. However, spouses may be required to pay medical expenses in some cases.
Your estate may take care of paying your car loan after you die unless you have a co-signer or an heir inherits the car. If the car payment isn’t made, it could be repossessed.
Credit Card Balances
Credit card debt that’s solely in your name is typically paid off by the estate if funds are available. If there’s not enough money in the estate to pay off a balance, it might be left unpaid.
Personal loans, like credit cards, are unsecured. They may also get paid off by the estate if you’re the sole borrower on the contract.
What happens to student loans when you die depends on the type of student loans you have. Federal student loans may be discharged after you pass away as long as a proof of death form is properly submitted to the loan servicer. Parent Plus loans might also be discharged if the student dies or the parent who took out the loan for the student dies.
For private student loans, terms may vary. Some private lenders may offer a death benefit or loan forgiveness after death, while other lenders might not. If there’s no death benefit, funds to repay debt may also need to come from the estate.
Who Else Is Responsible for Your Debt?
In many cases, you don’t have to worry about debt being a burden to others, but there are some exceptions. The names on the agreement will impact what happens to credit card debt when you die. If you have loans with a co-signer or credit cards with a joint account holder, they may still be responsible for paying the balance.
In some states with community property laws—namely, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—spouses could also be responsible for repaying some debts after a spouse dies.
In cases where your spouse or family members aren’t responsible for your debt, they could still receive calls about your debt. Under the Fair Debt Collection Practices Act, creditors are permitted to contact a spouse and executor about your balance. However, your family members also have the right to stop these calls. They can do so by making a formal request through a mailed letter.
Which Types of Debt Are Forgiven?
Besides federal student loans, few other debts are forgiven or discharged after someone passes away. Some medical debts could be forgiven and some credit card issuers may waive small balances. “Beyond that, it would depend on the specific terms of the debt, and most of them are not automatically forgiven,” said Hicks.
How to Protect Your Loved Ones
While death isn’t something we like to think about, it is inevitable. Here are some steps you can take to financially prepare.
Keep Clear Records
Maintain up-to-date records of your debt accounts somewhere safe. This can make the process of obtaining account balances easier for the executor when you pass away.
Consider setting up a debt repayment plan so you can work toward tackling debt. The debt snowball and debt avalanche are two popular debt repayment strategies that you could try. The snowball plan retires small debts first to help you build momentum. The avalanche plan targets high interest debts to help you save the most money.
Establish Your Estate Plan
Even if you don’t yet have a huge nest egg to pass down, chances are you’ll be leaving something behind—a house, a car, a laptop computer. An estate plan includes legal documents, such as a will, that outlines where these items should go. Having a plan in place can make settling affairs easier for your family.
Check Your Life Insurance Beneficiaries
Several types of life insurance policies exist, but in general, life insurance policies pay out a death benefit or a lump sum to beneficiaries after you pass away. If you have valid beneficiaries on your policy, the death benefit should go directly to them—and they will not be responsible for paying your debt with that cash windfall.
Suppose you do not have a beneficiary designation, or something happens and your life insurance is paid into your estate. Creditors could go after that insurance payout money for repayment of medical bills and other debt. “Having life insurance is great, but you have to check those beneficiary designations to make sure they are in place and updated,” said Hicks.