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Who Is Responsible for Your Debt After Your Death?
If you die and you’re in debt, can your creditors demand your heirs pay it back? The answer to this question depends on the debt that you owe, to whom you owe the money, and the state in which you live.
As a general rule, there are two major types of debt — secured and unsecured. Whether your debt is forgiven when you die depends on which kind you had.
Secured Debt
Secured debt is a debt that has some underlying collateral attached to it. For example, mortgage loans include liens that state that the lender owns the home (the underlying “secured” asset) until the loan is paid off. Other examples of secured debts include a car loan (secured by the car) and a business loan used to buy a specific piece of equipment. If you leave secured debts when you die, creditors will probably pursue your estate or beneficiaries to clear the balance of the loan or retrieve the asset.
If you have a loan on a piece of property that you want to stay in your family when you pass, secure a life insurance policy with a death benefit equal to the outstanding balance. Alternatively, if your estate has enough assets to cover the loan balance, you can ensure that these assets are liquidated to cover the loan through instructions in your will.
Unsecured Debt
Unsecured debt is a type of debt that is not tied to an underlying asset. There’s nothing for the creditor to claw back in the same way that they might repossess a piece of property if you don’t repay the loan. For example, if you leave student loan debt when you die, there’s no way for the bank that issued the loan to take recourse from your beneficiaries. Additional examples of unsecured debt include medical debt and most types of credit card debt.
If you die with unsecured debt, repayment becomes the responsibility of your estate. Your legal estate refers to all the assets, property and money left behind by you or another deceased person when they die. The executor of your will or personal representative of the estate manages the estate’s affairs, including addressing any outstanding debts left by the deceased. This could include dividing and selling the estate’s assets to pay off dues. Depending on state law, assets like retirement accounts and bank account liquid assets may cover unsecured debt if they are left without a named beneficiary.
These rules only apply if the debt was held by a single loan signer who is deceased. A joint account held by two people will usually become the responsibility of the surviving account holder. Proper estate planning before you die can limit your loved ones’ debt liabilities.
In community property states (such as Arizona, Texas, New Mexico, California and Washington), specific rules govern debt and property acquired during a marriage. In these states, both spouses are usually considered equally responsible for debts incurred during the marriage, including unsecured debt. The surviving spouse may be responsible for unsecured debt accumulated by the deceased spouse.
What Types of Debt Are Inherited?
Now that you understand the two basic types of debt, let’s look at specific financial obligations that you might have when you die and which types of debt people can inherit.
Credit Card Debt
Credit card debt is usually classified as an unsecured debt, so repayment most often falls on the estate of the borrower. Individual creditors can make claims against the estate of the deceased to recover the debts owed to them. If the deceased person’s estate doesn’t have enough money or assets to cover their debts, the debts may go unpaid or get paid partially. In those cases, credit card companies may have to write off the remaining balance as a loss.
If a deceased relative of yours left unsecured debts behind (like credit card debt or personal loans) and their estate doesn’t have sufficient funds to cover the debt, you might be worried about creditors pursuing you for the debt. However, if you weren’t an authorized user on the delinquent accounts or didn’t agree to be a guarantor, creditors have no right to pursue you for the debts of family members you aren’t married to.
Mortgage Debt
If you die and you have a balance on your mortgage, what happens next depends on the details laid out in your will and your marital status at the time of your death.
If the mortgage loan was jointly held with another person, such as a spouse or partner, the surviving co-borrower usually becomes responsible for the mortgage. This means the co-borrower becomes the lone name on the title of the property as well as the loan and becomes responsible for following the terms of the loan. The surviving borrower must contact the loan company to provide proof of death (like a death certificate or funeral documentation), so the lender can adjust the mortgage documentation.
If the deceased person had no spouse, joint borrower or co-signer on the mortgage, the responsibility for the mortgage typically falls on the estate. If the estate can’t cover the balance of the mortgage loan by liquidating other assets, the lender may seize control of the property to cover the outstanding debts. Final expense life insurance can also help cover the remaining balance of a loan if not used for funeral expenses.
In some cases, an heir or beneficiary of the deceased person’s estate may assume the mortgage. They take over the mortgage and become responsible for making monthly payments. However, taking over a mortgage is subject to the approval of the lender and may involve the beneficiary meeting certain criteria, such as demonstrating the ability to make payments. If you have a piece of property with a loan on it and you want to be sure that your heirs take control over it after you pass, a whole life insurance policy could provide peace of mind.
Student Loan Debt
The type of student loan debt you have determines what happens to that debt upon your death. With federal student loans, most loans are forgiven upon the death of the borrower. This means that the remaining loan balance is typically not passed on to the borrower’s estate or their surviving family members.
The loan servicer or the U.S. Department of Education should be notified of the borrower’s death, usually by a copy of the death certificate. Once the loan is discharged, the estate is no longer responsible for repaying the debt. Federal Parent PLUS loans taken out by parents to fund their child’s education are usually discharged upon the death of either the parent or the student.
Private student loans don’t always offer the same level of borrower protection as federal loans. The treatment of private student loans after death depends largely on the lender’s policies and the loan agreement. Sometimes, private student loans may have a provision for loan discharge upon the death of the borrower, similar to federal loans. However, if the loan has a co-signer or guarantor who is still alive, the lender will usually pursue them to make payments on the outstanding balance of the loan.
Medical Debt
Medical debt is another type of unsecured debt usually passed on to the deceased’s estate following someone’s death. Medical bills get treated like credit card debt in that medical companies may contact your relatives if you died owing them money. But they can’t collect from anyone you’re not married to.
How To Protect Loved Ones from Debt When You Die
If you know that you’ll leave debt behind when you pass, you might be anxious about the effect that this debt might have on your loved ones and your estate. Even if you have unsecured debt that your family is not liable for after you die, creditors still may make a claim against your estate. This can reduce or even eliminate the assets you’ve worked hard to pass down to children to leave to your spouse.
A life insurance policy can provide your loved ones with financial security after you pass and peace of mind while you’re still alive. Life insurance payments are provided as a lump sum to your beneficiaries, and there are no legal requirements or restrictions on how they use the death benefit. Life insurance death benefits are also exempt from income tax dues, meaning that buying sufficient coverage to protect your assets might be more affordable than you think.
Our Conclusion
While no one wants to think about the possibility of dying before their time, an accident can occur at any moment — and tomorrow is never guaranteed. If you’re currently holding secured or unsecured debt, it’s worth it to at least consider a life insurance policy. Exploring life insurance options while you’re still young and healthy can come with several benefits. Most notably, you may lock into a lower premium when you shop at a younger age, and you may not need to take a medical exam to get covered.
Frequently Asked Questions About Inherited Debt
Upon your death, unsecured debts such as credit card debt, personal loans and medical debt are typically discharged or covered by the estate. They don’t pass to surviving family members. Federal student loans and most Parent PLUS loans are also discharged upon the borrower’s death. However, mortgage loans and private student loans may have different rules and obligations, depending on the terms of the loan.
Spouses are not usually responsible for their deceased partner’s credit card debt unless they’re a joint account holder, co-signer or guarantor on the credit card account. The estate, made up of the deceased person’s assets and property, usually settles any outstanding debts.
When someone dies with a mortgage loan, the mortgage becomes the property and responsibility of any co-signer on the loan. In most cases, a surviving spouse must take on mortgage payments if they wish to continue living in the home. If the person dies and the mortgage loan was not held under joint account holders, ownership usually transfers to the lender with a lien on the property.
Unsecured debts are the most common types of debt forgiven at death. Examples of unsecured debt include federal student loans and medical bills.
Bankruptcy is a legal process in which people or businesses seek relief from overwhelming debt by petitioning a court to absolve all or part of their debt. In exchange, the party seeking bankruptcy must lose and liquidate assets to cover a portion of outstanding debt deemed reasonable by the court.
Debt forgiveness refers to the cancellation or reduction of a debt, typically through an agreement between the debtor and the creditor. It can occur through negotiation or a program designed to eliminate debt, and is not a legal process.
Methodology: Our System for Ranking the Best Life Insurance Companies
Our goal at the MarketWatch Guides Team is to provide you with comprehensive, unbiased recommendations you can trust. To rate and rank life insurance companies, we created a thorough methodology and analyzed each company by combing through online policy information, speaking to agents via phone, reading customer reviews for insight into the typical customer experience, and reviewing third-party financial reliability scores.
Our goal at the MarketWatch Guides Team is to provide you with comprehensive, unbiased recommendations you can trust. To rate and rank life insurance companies, we created a thorough methodology and analyzed each company by combing through online policy information, speaking to agents via phone, reading customer reviews for insight into the typical customer experience, and reviewing third-party financial reliability scores.
After collecting this data, we scored each company in the following categories: coverage, riders, availability and ease of use and brand trust. To learn more, read our full life insurance methodology for reviewing and scoring providers.
Sarah HorvathAuthor
Sarah Horvath is one of the home service industry’s most accomplished writers. Her specialties include writing about home warranties, insurance, home improvement and household finances. You can find her writing published through distributors like HouseMethod, Architectural Digest, Good Housekeeping and more. When not writing, she enjoys spending time in her home in Orlando with her fiance and parrot.
