Managing a Loved One's Debts After They Pass Away
Americans are increasingly burdened by debt, with nearly half anticipating they will die while still owing money.
Generally, a person’s debts do not disappear upon their death. Certain types of debt, such as federal student loans, are typically forgiven upon the debtor's passing, but private loans and cosigned accounts may still be owed. The process for settling these debts can also be influenced by state laws.
Although many Americans expect to leave behind debts, you can take steps now to shield your loved ones from inheriting or being responsible for your debt. If you're an executor or personal representative of an estate or have been contacted by a debt collector about a deceased relative's debt, it’s essential to understand your rights and responsibilities.
The Debt Problem in America
Debt has been a part of civilization for centuries. Lending with interest dates back to ancient Mesopotamia, and promissory notes were used for trade. The United States has always carried debt, borrowing funds from domestic investors and the French government to finance the Revolutionary War.
By 2023, total consumer debt had surpassed $17 trillion, up from $15 trillion in 2021, according to Experian. The largest debts include:
- Mortgages ($11.5 trillion in 2023)
- Auto loans ($1.51 trillion)
- Student loans ($1.47 trillion)
- Credit cards ($1.07 trillion)
- Personal loans ($571 billion)
The average debt per individual in 2023 was $104,215, a rise from $101,915 in 2022 and $96,371 in 2021.
Debt.org reports that 73% of Americans die with outstanding debt, with an average of nearly $62,000 in liabilities.
What Happens to Your Debt After You Die?
You may be familiar with the phrase “buried in debt,” which can resonate with many Americans struggling to pay off loans. But what happens to your debt when you pass away?
The answer depends on factors such as the type of debt and the state in which you reside. In most cases, your loved ones won’t be responsible for your unpaid bills, as creditors are generally paid from the assets in your probate estate or revocable living trust.
If your estate doesn’t have enough assets to cover the debts, creditors may receive only a portion of what is owed. However, there are exceptions to this, including:
- A cosigner on a loan
- A spouse in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin)
- A spouse in a state where they must pay certain medical expenses and other debts of the deceased
Laws around a surviving spouse's responsibility for medical bills can be complex and vary by state, so it’s vital to work with an experienced estate or trust attorney to ensure the proper handling of your affairs.
Surviving spouses and children may be contacted by debt collectors seeking payment for the deceased person’s medical bills. However, unless the survivor has agreed to pay or is required by state law, they generally aren’t liable for the debt.
Not All Debts Disappear Upon Death
Unless a debt is specifically discharged upon death, it doesn't simply vanish.
For instance, federal student loans, such as Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans, Federal Family Education Loans, and Federal Perkins Loans, are usually forgiven upon the borrower's death, provided the loan servicer is notified.
However, private student loans may not be forgiven. Some private lenders offer death discharges, but this is not always the case. In such instances, the cosigner or the estate may still be held responsible for repaying the outstanding balance.
Secured vs. Unsecured Debt
When settling a deceased person's debts, it’s crucial to distinguish between secured and unsecured debt:
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Secured debt is backed by collateral, such as a mortgage or car loan. If there aren’t enough assets in the estate to pay off the debt, the lender can take possession of the collateral. In some cases, surviving spouses may have legal protections that prevent foreclosure or allow for delayed foreclosure if they cannot pay the mortgage in full.
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Unsecured debt is not backed by collateral and includes credit card and personal loan debts. Unsecured creditors have lower priority in probate. If the estate doesn’t have enough funds to pay off all debts, unsecured creditors may not receive full repayment.
Funeral costs and any unpaid taxes or probate expenses take precedence over certain creditor claims. Executors are responsible for ensuring that debts are paid in the correct order according to state probate laws. Failure to do so could make the executor personally liable for unpaid debts.
Planning for Debt and Protecting Your Loved Ones
The saying "you can’t take it with you" applies not only to your assets but also to your debts.
Unresolved debts can complicate matters for your loved ones. While they might not personally inherit your debt, they could face harassment from debt collectors or, in the worst case, find that there is nothing left for inheritance once debts have been paid.
Here are some protections for your loved ones:
- State and federal laws limit how debt collectors can contact survivors. Spouses or family members should not assume responsibility for the debt until they consult with a lawyer to understand the specific circumstances. Debt collectors who go too far or provide misleading information may face legal consequences.
- When a beneficiary inherits a home, they also inherit the mortgage and are responsible for that debt. If inheriting a home with an outstanding loan, they might need to sell the property to pay off the mortgage or transfer the loan into their name. In some cases, federal law allows heirs to take over the mortgage without triggering a due-on-sale clause.
- Estate and trust laws vary by state, so it's advisable to consult with a local lawyer if you have concerns about how unresolved debts could affect surviving family members.
Estate planning is about the legacy you leave behind, and it’s important to consider any debts in your planning. An estate planning attorney can guide you in managing your debts or assist your family with resolving them after your passing. Reach out for help with debt planning or managing a loved one’s affairs.