What Happens to my Debt When I Die? Is it Forgiven or Transferable?

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Some debts are forgiven when you die, but others may be collected from your estate. If you die in a community property state (states where married couples equally own all assets), your spouse may be responsible. If your outstanding loans are greater than the value of your estate, the debt will typically not transfer to family members.

However, anyone who cosigned a loan, is a joint credit card account holder or wants to keep property may be liable for your debt.

What happens to your debt when you die?

What happens to a deceased person's debt depends on the laws of the state where they lived. But the financial process is relatively consistent.

First, your estate's executor, either previously appointed by you, or the state's probate court after you die, obtains a record of all your outstanding debts from a credit report or a review of your bills. The executor should notify the Social Security Administration and all your lenders when you die, sending certified copies of your death certificate and any essential account information.

When you die, your debt is passed on to your estate, so the executor will compile a list of all debts and determine the legal order in which they should be paid.

The order of payment varies by state, and some forms of debt, such as medical bills or a mortgage, are typically first priority. This process of aggregating (collecting) assets, paying off debts and distributing any remaining money to your heirs is called probate. It can take several months if you don't have a clear will in place.

The majority of your assets immediately become part of your estate when you die, meaning creditors can come after them. However, that usually doesn't apply to:

  • Life insurance
  • Retirement accounts, such as IRAs and 401(k)s
  • Brokerage accounts

The accounts listed above require you to name a beneficiary and skip the probate process. However, if you forgot to name one, or they've also died, your assets remain with the estate. This is why it's essential to update your designated beneficiary every few years.

Will your debts be forgiven or are they transferable?

Your debts are transferred to your estate when you die. If your liquid assets (such as checking and savings accounts) are large enough to cover the debts, they won't be passed on to your spouse or heirs. The situation is trickier if:

  • Anyone cosigned one of the loans or is a joint account holder for a credit card
  • Your secured loans (such as auto loans or a mortgage) exceed the value of your liquid assets
  • You lived in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin)

In these situations, whether a debt is forgiven or passed along to your immediate family will vary by type of debt.

Student loans after you die

Federal student loans are forgiven when you die. Similarly, federal PLUS loans are forgiven when either the student or their parent dies.

The rules for private student loans depend on the lender and state. While some, such as Sallie Mae, will forgive the loan when you die, most will attempt to collect from your estate. If there's not enough money in your estate to cover the loan, it may only impact your family if:

  • They cosigned the loan, in which case they would be responsible for paying it
  • You were married when you obtained the loan and live in a community property state, in which case your spouse would have to pay it

If you don't live in a community property state and no one cosigned the loan, the lender may attempt to collect from your estate but has no recourse if there's not enough money. So, the student loan will go away, as the lender can't collect from your family.

Mortgage loans when you die

Your house isn't usually considered part of your estate. For example, if your credit card balances exceed the value of the rest of your assets, the credit card company wouldn't be able to put a lien against your home. However, a mortgage loan would not be forgiven. It will still need to be paid.

Your spouse or the person who inherits your house will typically have the option of taking over mortgage payments. If they're unable to make the payments and your estate cannot cover the outstanding mortgage, the person who inherited the house will have to sell it and pay the mortgage. Otherwise, the lender most likely will foreclose on the property.

Credit card debt after your death

When you die, the executor should notify credit card companies so they stop adding fees or penalties onto the outstanding debt until the estate is settled.

Joint cardholders are responsible for an outstanding bill if you die. Authorized users are not, unless they charge anything to the card after you die It could be viewed as fraud, or they could be held responsible for any balance.

And your spouse could be on the hook if you lived in a community property state.

If you didn't have a joint cardholder or live in a community property state, then the balance on the cards after your death would be collected from your estate. Any other fees or penalties would not have to be paid.

What happens when you die with medical bills?

Medical debt is more complex. Assuming you didn't receive Medicaid, your family would likely only be held responsible if they made a financial commitment or guarantee to the medical institution. Given the high cost of care, this is often requested when a family member stays at a hospital or nursing home for an extended period. In addition, if your family claimed you as a dependent or their legal relationship to you involves a "duty of support," they might have to pay for your care.

While the majority of states have filial (your children's) responsibility laws, they're rarely enforced. The laws can require your adult children to cover medical bills not covered by your estate. If you received Medicaid, the state could file a claim against your estate for any medical care after age 55. There are some caveats to this, so check your state's regulations. This debt would not transfer to your heirs and family members.

Car loan after your death

Car loans are not forgiven at death. So, if your estate can't cover the debt, the person who inherits the vehicle needs to decide if they want to take over the payments. Otherwise, the car could be repossessed by the lender.

Debt collectors and family members

Loan cosigners and joint account holders can be held responsible for debt, and family members may have to cover debts for inherited property they keep. While community property states can only make a spouse pay off loans taken out during your marriage, half of the community property can be considered part of your estate and used to pay creditors.

Assuming none of these situations applies, creditors are usually out of luck for any debts that can't be paid by your estate. Exceptions to this can occur if:

  • You distributed deathbed gifts: This can include any money or items of value given away just before you die. Creditors may be able to have these assets added back to your estate.
  • Your family distributed any of your assets during probate: If your family gave out antiques, family heirlooms, or any other items of value before your debts were settled, creditors could try to get them added back to your estate.

It's common for debt collectors to reach out to family members and pursue payment, but these inquiries should be directed to the executor. If debt collectors begin to personally harass the surviving family or suggest (incorrectly) that the family is responsible for the debts, they should file a complaint with the state attorney general's office.

Using life insurance to protect your heirs from debt

Life insurance is often used in financial planning to help families cover debts when a loved one dies. Depending on the amount of debt and how long you expect it to be outstanding, you can choose term or permanent coverage.

Term life insurance

Term life insurance can shield your heirs from debts or ensure your spouse can maintain their standard of living. Term policies are the cheapest form of life insurance coverage and can be tailored to the size of your debts, such as mortgages or auto loans. Term life is an excellent option if you have a large amount of debt, such as a 30-year mortgage, or are uncertain how long the debt will be outstanding when you die.

You may purchase a policy with a term and death benefit that match the length and amount of your mortgage. Term life insurance policies are cheaper than other forms of insurance, so they're usually the best choice if you need a large amount of coverage.

When you buy a term policy, you can name one or more beneficiaries to receive the death benefit if you die. Upon your death, the beneficiary would file a claim and be paid directly by the insurance company, as the money isn't considered part of your estate.

The only exceptions to this are if you didn't name a beneficiary or your beneficiaries are also deceased when you die. In these cases, the life insurance payout would be added to your estate and could be used toward outstanding debts.

Joint life insurance

Joint life insurance policies are a form of permanent life insurance typically for couples. The policies pay out upon the death of either of the two policyholders. When a death benefit is paid depends on the structure of the policy:

  • First to die — pays a death benefit when one spouse dies. This type of policy is preferable when you want to make sure your spouse can keep their standard of living. For example, you may buy enough coverage to pay for an auto loan, so they don't lose their transportation.
  • Second to die — pays the death benefit when both you and your spouse have died. This policy is more often used in estate planning, as it can help heirs pay inheritance taxes or any debts passed to them.

Credit life insurance & mortgage life insurance

When you get a loan, you may be offered credit life insurance to ensure your family doesn't inherit your debt. Credit life insurance is similar to term life insurance, but the only beneficiary is the lender, and premiums are more expensive.

Consider the pros and cons of credit life insurance. If you're concerned about debts being passed on, get a term life policy instead. And don't let a lender pressure you into buying life insurance when obtaining a loan. Though there are some cases in which a lender can require proof of life insurance, they cannot mandate that you purchase the coverage through them. is a type of credit life insurance. It's not recommended if you're able to obtain a term life insurance policy elsewhere.

However, if you have significant preexisting conditions, some insurance companies will not offer a large enough death benefit to cover a mortgage. In these cases, if you want to make sure your family can stay in the home, mortgage life insurance can be a helpful form of financial protection for your family.

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