Debt usually doesn’t die when we do.
A number of factors determine what happens to debt when you die, including whether someone co-signed the loan, whether the debtor had assets at the time of death, and what type of debt they held. The laws also vary from state to state.
In general, debts must be paid off your estate when you die – when you have assets. (We’ll look at co-signers, spouses, and joint accounts a little later.)
For example, if you die with $ 100,000 in cash in the bank and $ 10,000 in credit card debt, that debt must be paid back before anyone can inherit. The creditors come first for the assets of a dead person.
“Your executor or administrator – the person responsible for your estate – will use the assets you left behind to pay off this debt before your family receives anything,” said Carmen Rosas, a California-based estate attorney.
“Paying that debt could mean simply writing a check from a bank account or selling assets for cash to make those repayments.” These assets can include the person’s house, cars, or other valuable items.
The executor should notify creditors, credit bureaus, and banks of your death as soon as possible. By notifying these agencies early on, there is a better chance your family will prevent someone from stealing your identity for financial gain.
Your executor can also request a copy of your credit report detailing what debts you had.
Creditors want – and expect – to be paid off your estate. You can assert a legal claim before a probate court. This is the legal process that oversees the handling of your estate.
Since it can take a while to clear your financial affairs, creditors can agree to a settlement with your estate for less than the total amount of the debt.
“You’d rather have 40 or 50 percent now than grappling with all the hassle and uncertainty of waiting,” said John O’Grady, a San Francisco-based real estate attorney. “All creditors want cash and prefer instant cash.”
If your assets don’t cover your debts, they typically don’t get paid, according to the Federal Trade Commission.
Here’s what happens to different types of debt when you die.
What happens to debt when you die?
Co-signed loans and credit cards
If you have a co-signer of a loan, such as For example, a student loan, that person is responsible for paying off the debt when you die. The same applies to a shared credit card.
“Once you co-sign a financial commitment, you are telling the bank that you will be 100% responsible if the other person doesn’t pay,” said Linda Kerns, a Philadelphia attorney.
“My best advice for co-signing is if you are not willing to pay 100% of the balance you co-sign for, you shouldn’t,” she adds.
In some states known as Community Property States, it doesn’t matter whether or not your spouse was technically a co-signer – your assets are considered communal. If one spouse dies, the other is responsible for paying off the remaining debts.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are community owned states. Alaska gives parties the opportunity to make their assets jointly owned.
If there is no joint account holder and you do not live in a community owned state, the credit card debt will fall on your assets, which will use your assets to pay off.
If you borrow money from the federal government for college and die, that debt goes away – the loan is automatically canceled.
However, private student loans are not canceled after death. The lender will try to collect from your estate.
If you die and you have a mortgage, it won’t go away. If you shared the home with a spouse, responsibility for mortgage payments is now theirs.
If you were the sole owner, your estate can sell your home to pay off other debts. After all of your other debts have been paid off and you have bequeathed the house to a family member, they will have to keep making payments to the bank or selling the house.
What if you don’t have a fortune?
If you die in debt and with no assets (and no co-signers), the creditors are simply out of luck.
“The best plan is to die without a fortune,” said O’Grady. “Spend it, give it away while you live, enjoy it and let the people in your life enjoy it and die with nothing.”
Debt collectors can call members of your family after you die while you are trying to collect your debt – and they are allowed to do so by the Federal Trade Commission.
However, debt collectors cannot mislead your family members into believing that they will be personally liable for your debts after death.
And the FTC says collection agencies can only call your spouse or the executor of your estate if you’re trying to collect. You can call other relatives, but only to find a spouse or the administrator.
Sarah Kuta is an employee of The Penny Hoarder.