If you own valuable assets when you die, that can be a bright spot during an otherwise incredibly difficult time for your loved ones who stand to inherit. But if you also have a lot of debt, it could wipe out those assets or even become the responsibility of your family to pay off.
A whopping 73% of adults had outstanding debt when they were reported as dead, according to 2016 Experian data provided to Credit.com. The average total balance was $61,554, including mortgage debt, or $12,875 in non-mortgage debt.
Here’s what you need to know about what happens to debt when you die, and how to protect yourself and loved ones from financial issues that could arise after a death in the family.
Do Loved Ones Inherit Debt Upon Death?
“There is often a fear from children they will inherit the debt of their parents, or that a spouse will inherit the student loan debt of their husband or wife,” said Philip J. Ruce, an estate planning attorney and owner of Stone Arch Law Office in Minnesota. Fortunately, he said, in many cases you won’t inherit the debt of a relative who has died. Even so, there are definitely situations in which that can happen.
When a person dies, his or her estate is responsible for settling any debts, Ruce explained. Debts that are secured by an asset, such as a mortgage or auto loan, can be handled by either selling the asset and using the proceeds to pay off the loan, or by allowing the lender to repossess or foreclose on the asset.
“If the family wishes to keep the asset, such as the family home, the family member who receives the house will almost always have to refinance to a new loan,” Ruce said.
If a person dies with unsecured debt, such as credit cards or an unsecured personal loan, funds available from the estate are used to pay it off before anyone receives an inheritance (with some exceptions, depending on the state).
“If there is not enough money in an estate to pay off these loans, then the estate is insolvent and the executor or personal representative will usually go through the probate system to determine which debts are paid” and in what order, Ruce said.
Any remaining debt for which the person who has died had sole responsibility will be discharged.
However, in the case of co-signed debt, such as an auto loan or private student loan, the co-signer is usually liable for it if the primary borrower dies. Ruce said that in some rare situations, the loan contract requires the co-signer to pay off the balance immediately upon the death of the borrower.
“This is called an automatic default provision, and it can be pretty scary,” he said.
Joint or co-borrowers are also on the hook for debt if the other borrower dies.
How Different Types Of Debt Are Handled When You Die
Though the general rules above apply in the case of a death, there are some nuances to how certain types of debt are handled. Here’s a look at what can happen if someone dies with some common types of debt.
Credit Card Debt
When a person dies with credit card debt, two scenarios can occur. If there is no estate, co-signer or joint cardholder, those debts die with the individual. Even so, credit card companies might call and demand payment, according to Leslie H. Tayne, a debt resolution attorney and author of the book “Life & Debt: A Fresh Approach to Achieving Financial Wellness.”
If there is an estate, the debt might still be discharged, but the credit card companies can file a claim against the estate, she said. Generally, they’ll wait up to two years to see a claim is worth pursuing.
If the person who died had a joint credit card, the other cardholder becomes responsible for the debt. This is the case regardless of whether they were the person who made the purchases or were paying the bill previously. However, this is not the case for authorized users, who are not responsible for the debt in any situation.
“If a loved one passes away, don’t use their credit card,” Tayne said. “Using a deceased person’s credit card is fraud. This includes if you continue to use the card as an authorized user on the account, knowing that the debt won’t be paid off by the primary cardholder. Tayne also advised that family members notify the credit card companies and credit bureaus of the death right away, including sending an official copy of the death certificate, to avoid problems.
Unlike credit card debt, payments need to continue on a mortgage after the borrower’s death or else the lender can foreclose on the property.
If the person who died had a co-borrower on the mortgage, such as a spouse, that person then takes over sole responsibility for the payments and must continue to make them and/or refinance to avoid foreclosure.
If there was no co-borrower, but there was a co-signer, the co-signer becomes solely responsible for the mortgage payments, according to Tayne.
“If there is no co-borrower or co-signer on the home, the home will be inherited by the beneficiary named in the will,” Tayne said. If there is no beneficiary named, a family member can likely take over payments instead thanks to a Consumer Financial Protection Bureau rule that went into effect in 2014, which eased the process of naming a beneficiary who is qualified to make payments.
“Heirs are then able to refinance the loan or pay off the debt in full,” she said, noting that the executor of the will can use the estate’s assets to pay off the home and then give it to the heirs mortgage-free.
Student Loan Debt
When a borrower with unpaid federal student loans dies, that debt is discharged even if it was co-signed. “A loved one will need to submit proof of death to the student loan servicer in order to get the loan discharged,” Tayne said.
The rules differ between lenders for private student loans. Often, lenders will discharge the loan if the borrower dies, Tayne said. If there is a co-signer, however, that person might still be responsible for paying the loan upon the borrower’s death.
“Additionally, if you live in a community property state and you are married, your spouse will then be responsible for your [private] student loan debt upon your death,” Tayne said. This usually only applies to debt incurred during the marriage, though laws vary by state.
Protect Your Family From Debt After Death
Dealing with a death in the family is hard enough; you probably want to spare your family the added headache of sorting out your debts if you die. Here are a few things you can do to ensure a smooth transition:
- Know the terms: Understanding the terms of your debts before you take them on is important in knowing what will happen to them when you die, Tayne said. “For example, read through the terms of a private student loan before taking it on to understand whether the burden would fall on your family if you passed away,” she said.
- Keep good records: Tayne said it’s also important to ensure your loved ones know about all debts to your name, including who you owe, how much you owe and how to access your accounts. “This includes passwords and security login information so that your loved one can easily manage your affairs for you after death,” she said.
- Maintain low balances: The best way to ensure your debt isn’t passed on to family is to maintain low balances when possible. So if you have debt sitting around that you can afford to pay down more quickly, consider getting rid of it sooner rather than later ― just in case. You might also want to avoid adding a co-signer or joint account holder unless absolutely necessary to prevent that liability from passing on to them.
- Consider life insurance: A life insurance policy can help your family pay off your debts after you die. However, Tayne said the desire to have funds used this way needs to be communicated clearly in the policy. “This can be especially beneficial if the person you’re leaving your home to would have trouble making mortgage payments,” she said.
- Consider legal help: “Consulting an estate attorney can help you understand exactly what will happen when you die, and what options you can pursue while you’re living in terms of your assets and your will to help avoid debt falling on your loved ones upon your death,” Tayne said.