What Happens to Debt When You Die?

Key Takeaways
  • Most people die with debt.
  • In most cases, the estate of the deceased is responsible for payingany remaining bills.
  • Creditors often pressure heirs to repay debts even if there is no legal obligation to do so.
  • Life insurance, paid on death, and retirement accounts with designated beneficiaries can bypass the estate and give heirs a financial inheritance even if the deceased has outstanding debts.

Dealing with debt collection calls after the death of a loved one is the last thing you want. Yet, 73% of consumers have bills remaining when they pass away,with an average debt balance of $61,554.

Existing debts could include a mortgage, car payment, credit cards, student loans, medical debts, or unpaid utilities. Your legal obligation to repay the bills of a deceased loved one depend on several factors, which can include:

  • Your relationship to the deceased:A spouse may have legal obligations to repay some debts that children do not.
  • Other names on the loan: Joint accounts, co-signed loans, and other guarantees could result in a third party becoming liable for an outstanding debt.
  • Any secured property you want to keep: If you wish to retain property with an outstanding loan attached, it is necessary to pay it off or refinance the loan.

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What Happens When a Loved One Dies?

After the death of a loved one, the executor must sort through the person’s finances, pay all outstanding debts based on state laws, and then distribute any remaining assets to heirs. Account titles playa significant role in who receives assets and what becomes property of the estate. Naming a beneficiary on life insurance policies, retirement accounts, and even bank accounts will bypass the estate and give money directly to heirs. Creditors do not have a legal right to those funds even if outstanding debts exist when this occurs.

Any assets without a designated beneficiary will become part of the estate. The executor will use those funds to repay creditors before any distribution to heirs.

Types of Debt and Its Treatment After Death

Secured debt or loans with collateral: Creditors get paid based on the value of the property securing the debt. Any remaining obligation becomes part of the unsecured debts when the collateral sells for less than the balance due. When the property sells for more than is owed, the remaining funds go to the estate to pay additional creditors or paid out to heirs.

Co-signed or joint accounts: The surviving owner of joint or co-signed debt becomes responsible for payments.

Student loans: Upon death, federal student loans are discharged.PLUS loans can qualify for a discharge after the death of either the parent or the student. Private student loans follow the policies of the lender.

When Can Spouses Inherit Debt?

In some cases, a spouse becomes responsible for some remaining debt obligations.

Community property states share both assets and liabilities. The surviving spouse would inherit all the property and all the debt obligations, even if they did not sign for the loan. Debts that predate the marriage are the exception.

Collateralized loans: If the spouse wants to keep the property secured by an outstanding loan, they must pay off the loan or make payment arrangements with the lender.

Joint accounts: Any accounts listed in both spouses’ names becomes the responsibility of the surviving spouse.

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Medical debts in states with a filial responsibility statute. These laws can hold the spouse, and in some cases adult children, responsible for the medical bills of the loved one. If the parent was on Medicaid, the state could attempt to collect repayment for services received from 55 until death from the estate. If funds are not available in the estate, the state cannot pursue payment from the spouse or other close relatives.

Dealing With Bill Collectors

Even when you are not legally responsible for a debt, bill collectors can pressure you to pay the bills of a loved one. Some try to convince you that you are accountable, where others use the moral obligation argument to guilt you into paying an account you do not owe.

If you have questions about what you are and are not responsible for, contact an attorney in your state for clarification.

  • Will I be responsible for a loved one's debt after they die?

    In most cases, any remaining debts become the responsibility of the estate. Family members are not liable for most debts, and if the estate does not have enough to pay all creditors in full, the creditor may not get paid.

  • Is debt forgiven when I die?

    Not generally. Creditors have the right to make a claim against the deceased’s estate to receive payment for monies owed.

  • What happens to debt if I die?

    Creditors make payment claims to the estate of the deceased. If the estate does do not have enough funds, a creditor may not receive payment. However, joint accounts and co-signed debt can transfer to the surviving borrower.