When it comes to money management, there may be no topic more emotionally charged than inheritance. This is true whether you’re planning what will happen to your own money and property or inheriting something from a loved one.
One major question you might have is what will happen to your debt when you die. Typically, debts will be handled by the estate with some exceptions applying for co-signers, joint borrowers, secured debts, and state-specific rules.
Understanding what happens to debt after you die 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 debts are forgiven at death?
- 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 debt, like federal student loans, essentially go away when you die, most forms of debt don’t. 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. The estate executor is usually named in a person’s will—they can be a family member or someone familiar with inheritances like a probate lawyer or accountant.
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.
It’s the estate executor’s responsibility to pay off these debts with the money from the estate before they distribute the rest to the heirs named in the will. Keep in mind, laws and creditor claim processes can vary by state, and executors can become legally liable for the debts if the process is not followed correctly.
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, your estate is considered insolvent. An insolvent estate will mean that your executor must follow a specific process according to state laws to prioritize and handle these debts—this could include things like asset liquidation or property sales to pay off the debt. As long as you are the only name on the account and don’t 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 debts are forgiven at death?
Some debts may be forgiven at the time of your death and won’t need to be paid by your estate. This includes most federal student loans. Once the loan servicer or the U.S. Department of Education receives a copy of the borrower’s death certificate, the loan will typically be discharged, and the estate won’t be responsible.
This doesn’t apply to the majority of private student loans or other unsecured debts, though. Credit cards, medical bills, and personal loans may effectively go unpaid if the estate lacks sufficient assets. However, it's important to know that co-signers, joint account holders, and, in some cases, spouses may remain responsible for certain unsecured debt obligations.
What happens to a mortgage after death?
Mortgage debt is not forgiven at death and will still need to be paid by the estate. But don’t worry, your loved ones can’t be forced to take responsibility for the remaining mortgage if it’s only in your name. The debt is tied to the home itself since it acted as the collateral for the loan. This means that if no one is inheriting the home and taking on the payments, the home may be foreclosed by the lender to recover the debt.
If there is someone inheriting the home who didn’t co-sign on the original loan, they’re not personally responsible for the mortgage. But, if they want to keep the home and not risk foreclosure, they will need to take over the mortgage payments.
What happens to a car loan after death?
Similar to a mortgage, the debt is tied to the car itself and if there is no co-signer, it will become the responsibility of the estate, not your loved ones. The estate (facilitated by your executor) can either pay off the remainder of the loan using estate funds and then transfer the paid-off title to an heir, assume the loan under an heir’s name, sell the vehicle to fund loan repayment, or allow the vehicle to be repossessed by the lender. This will depend on how much is left in your estate and if you named any heirs.
If your car is leased and there is no co-signer, the lease will become part of your estate and will need to be paid off by the estate for the remainder of the lease term.
What happens to a personal loan after death?
Personal loans 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 should first confirm that you are in fact responsible for the debt, contact the lenders, and review estate or benefit sources. Then you can look into repayment options and potentially consider consolidation when appropriate.
- 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 debt, 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.
- 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 afford. And some may either settle for less than the original balance or adjust your interest rates to make it more affordable.
- Consider refinancing or consolidating debt: Handling multiple debt balances can be stressful, not to mention costly if you’re now the only person left responsible for high-interest debts.
Consolidating your debt by taking out a personal loan to cover the balance could help. This approach streamlines debt repayment, because you’d be 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 could pay off debt faster.
If a loved one has passed and you co-signed loans with them, you may become the only borrower. This unexpected responsibility can be manageable though. If you’re nervous about your ability to repay multiple co-signed debts, our debt consolidation calculator can help you estimate what you might save by combining multiple debt balances into one.
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