What Happens to Debt after the Death of the Borrower?

That’s true whether you’re planning your own estate (figuring out what will happen with your money and property after you die) or if you think you’ll inherit something from a loved one. If you’re planning your own estate, you might be wondering what will happen to your outstanding debt and whether it might affect your loved ones after you die. And when you’re contemplating the loss of someone special, you’ll want to know how their financial past could affect your future.

Understanding what happens to debt after death can help you feel more prepared and may alleviate some of your concerns. So, here are answers to some of the most common questions about debt after death.  

Table of contents

• What happens if a loan holder dies?
• What happens if you die with more debts than assets?
• What happens to a mortgage after death?
• What happens to a car loan after death?
• What happens to a personal loan after death?
• What should you do if you become responsible for debt as a co-signer or joint borrower after someone dies?

What happens if a loan holder dies?

While some types of debts, like federal student loans, essentially go away when you die, most forms of debt are not handled this way. That doesn’t mean your loved ones will need to dip into their personal finances to cover your debts. Instead, the estate executor will take care of any outstanding debts using the money and property you leave behind.

After you die, your creditors have a right to file a claim against your estate for the money you owe. That money would come out of your estate, along with any other expenses like funeral or burial costs, if you leave behind enough money or property to cover them. Then, the remaining funds are released to your heirs according to the instructions in your will. 

What happens if you die with more debts than assets?

If you don't leave behind any money or property, or your debt is worth more than your assets, any remaining balance on your debts goes into default. But as long as you were the only name on the account and did not have a co-signer or joint borrower, your loved ones won’t have to pay your outstanding debt.

However, if two or more people owned the account, your co-signer or joint borrower is still on the hook for the balance. For example, if you shared a credit card with your partner, it becomes your partner’s responsibility after your death.

What happens to a mortgage after death?

Don’t worry, your loved ones can’t be forced to take responsibility for the remaining mortgage if it’s only in your name. But if they want to keep (or sell) the home, they’ll need to talk to the mortgage company about assuming the loan and avoiding foreclosure.

What happens to a car loan after death?

If your estate can’t cover your car loan debt, your loved ones can allow the lender to repossess the car. If they want to keep the car, they’ll need talk to the lender about assuming the debt. They can also sell it to pay off the loan. If your car is leased and there is no co-signer, the lease will become part of your estate. Your loved ones will likely be responsible for continuing the payments.¹

What happens to a personal loan after death?

Personal loan debts won’t burden your loved ones, as long as you’re the sole account holder, but they will be paid out of your estate. However, if there’s a living co-signer or joint borrower on the loan, that person will still be responsible for making payments against the borrowed amount, per the terms of the loan.

What should you do if you become responsible for debt as a co-signer or joint borrower after someone dies?

If you find yourself solely responsible for a debt you co-signed or jointly borrowed with someone who died, you may be feeling overwhelmed. But knowing you have options for how to handle it can help you feel more empowered as you move forward. You can: 

1. Sell assets and collect life insurance or retirement benefits: If you inherited assets other than cash, selling them may be the simplest way to pay off unexpected debts, especially if you inherit a car or home. If your loved one had a life insurance policy or retirement plan, check whether you’re entitled to life insurance proceeds or retirement benefits. While creditors can file a claim against your loved one’s estate, these assets may be exempt in some states. Make sure you receive what you’re entitled to, so you can use those funds to pay down any debt you shared with the deceased. Consult with a lawyer or financial adviser for your particular circumstances.
2. Contact your creditors if you need help: While it can be tempting to ignore unexpected bills, reach out to your creditors for help. Most lenders will work with you to find a debt repayment plan you can live with. And some may either settle for less than their original balance or adjust your interest rates to make it more affordable. 
3. Consider refinancing or consolidating debts: Handling multiple debts can be stressful, not to mention costly, if you are left as the only debtor on high-interest debts.

Consolidating your debt by taking out a personal loan to cover the balance can help. This approach streamlines debt repayment since you’re making a single monthly payment instead of paying each creditor separately.

Taking out a personal loan may also help save you money. If you are now the only borrower on higher-interest credit card debt for example, you could pay thousands of dollars in interest by the time you pay it off. Consolidating debt with a personal loan that has a lower interest rate than your other balances means you’ll pay less interest, so you can pay off debt faster. 

Becoming the only borrower on debt you weren’t expecting isn't easy, but it can be manageable. Our debt consolidation calculator can help you estimate what you might save if you combine those multiple debts into one.

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