Published in: Banks | Dec. 27, 2018

What Happens to Your Debt When You Die?

Will your debt continue to haunt you from beyond the grave? Find out what exactly happens to debt when you die while you still owe.A person sitting in the corner of a dark room holding their head in their hands.

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Americans are dying with an average of $62,000 in debt, according to recent data. This is a whole lot of money to owe, and it raises a very important question: what happens to all of this debt? A person who has passed on obviously can't pay the debt personally, but that doesn't mean that creditors don't have ways to collect.

The specifics of what happens to debt after death will vary based on a few different factors, including the type of debt, whether there was a cosigner, and the value of the deceased person's estate. Here's three possible things that could happen to your debt after you've passed on.

Your estate may have to pay it

In many cases, debt that you owe during the course of your life will have to be paid by your estate when you die.

The assets you leave behind -- including your house, your bank accounts, investments, and other valuable property -- all become part of your estate after your death. Creditors are able to make claims against your estate during the probate process, which is the legal process that occurs to settle your affairs and transfer your assets.

If you died with a will and named an executor, the executor will usually use the assets you left behind to pay off your debt. This means writing checks from your bank account, but it could also mean selling property to generate funds to pay back your debt.

If you don't have enough assets, creditors are typically out of luck if you had unsecured debt without a cosigner. Your credit cards, for example, may not be fully paid off. But, if you had a secured loan, such as a mortgage or a car loan, the debt would need to be paid for your family to keep the asset.

This could mean, for example, that if you leave your home to your heirs, they'd have to take over paying your mortgage to keep the house.

Unfortunately, creditor claims will take precedence over your wishes for what happens to your assets. If you specified in your will that your bank account should go to your kids, but you owed money to a creditor, the money in the bank would first be used to pay the creditor before your kids could inherit.

Cosigners or joint debtors may have to pay it

If your estate doesn't have enough assets to pay off your debts, then creditors can go after any cosigners on the loans. Cosigners share legal responsibility for debt, and will be held 100% responsible for paying the full remaining balance.

There could be a potential exception to this general rule for certain types of student loans. For example, a Parent PLUS loan can be dischargeable due to a student's death, and some private student loans offer a death discharge -- although not all do.  If the primary borrower on student loan debt dies, the surviving cosigner should read the loan terms carefully to find out whether they'll still be held responsible for paying it.

Creditors can also try to collect from co-borrowers if you had a joint account. For example, if you and your spouse had a mortgage together or shared a credit card, your spouse would be expected to continue paying the bills after your death.

It may be forgiven or charged off

Federal student loan debt should be forgiven upon the death of the borrower, so if your loved one had educational debt and passed on, you won't have to worry about paying the loans back.

In other cases, if there's no cosigner and not enough money in the estate to pay the bills, creditors will just have to charge off the debt because there's no way to collect. While creditors sometimes try to guilt family members into paying after their deceased loved one's death, typically there is no requirement that you pay debt that belonged to a loved one.  

There are some limited exceptions to this general rule, such as in states that apply community property laws and require spouses to pay off debt belonging to a deceased spouse using community property. But, in general, you aren't responsible for debt you didn't take on and you should talk with a lawyer if someone tries to make you pay your deceased family members bills.

Make sure to understand your rights

If you are worried about your loved ones being stuck with your debt after you die, make certain that you understand the types of debts you have and the rules for repayment. You may wish to work with an estate planning lawyer to protect your assets and ensure your family can still inherit without being burdened by big debts.

If your loved one has already passed away and you're concerned about what will happen to their debts, an attorney with experience in probate can typically provide assistance and can help to make sure creditors don't take advantage of you in a vulnerable time in your life.

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