When someone dies owing money, the debt is generally paid from their estate from whatever money and property they left behind. If the estate can't cover it, most of those balances go unpaid, and nobody else picks them up.
The exceptions are narrow: a cosigned loan, a joint account, or a community property state can leave a spouse or family member legally responsible. Which one applies depends on the type of debt and the state, so it's worth knowing before a collector calls.
What happens to your debt when you die?
When you die, your debt is likely paid out of your estate. Your estate is any money or property you’ve left behind. If you have bank accounts, cars, real estate, jewelry, or collectibles, those may be sold after your death to pay off your debts. Any remaining funds then typically go to your heirs as outlined in your will. If you die without a will, a probate court determines how your estate is used and which debts get paid first.
Secured debts, which are backed by collateral, typically take priority. That includes mortgages and car loans. If there is no estate, or the estate isn’t enough to cover the debts, those debts likely go unpaid.
If you're settling an estate or planning your own, a licensed estate attorney can walk you through what your state actually requires. Many offer a short consultation at no charge.Find one through your state bar's referral service, or contact legal aid if cost is a concern.
Types of debt and what happens to each after death
| Type of debt | What happens when you die | When a family member is responsible |
|---|---|---|
| Mortgage debt | If the mortgage goes into default, the lender can take ownership of the home to cover the debt, a process called foreclosure | If someone is inheriting the home, they’ll need to take over the mortgage payments |
| Credit card debt | If there’s money left in the estate after satisfying secured debts, credit cards and other unsecured debts will be paid | If someone is listed as a cosigner or co-owner on a joint account, they will be responsible for repaying the debt; spouses who live in a community property state may also be responsible for the debt |
| Student loan debt | Federal student loans are discharged when the borrower passes away; this is often the case with private student loans, but you’ll want to review the loan agreement | Cosigners on private loans taken out before November 20, 2018 may be responsible for repaying the loan, depending on the lender’s policy |
| Auto loans | If the loan goes into default, the lender can repossess the vehicle to cover the debt | If it’s a joint debt, the co-owner will need to take over the payments; spouses who live in a community property state may also inherit the debt |
| Medical debt | Outstanding medical bills will be paid out of the estate; if there isn’t enough in the estate, the court will follow state laws to decide which debts get paid | A family member may be responsible for the debt if they cosigned on a medical bill or live in a state that requires adult children to assume a deceased parent’s medical debt (but these laws are rarely enforced) |
When family members are responsible for your debt
There are exceptions. In these cases, another person may be held legally responsible for the debt.
- They’re a joint account holder or cosigner. If you cosigned a loan or opened a joint credit card, you’re already legally responsible for the debt. Nothing transfers, rather the lender has only you to collect from. Federal student loans are exempt, as are private student loans taken out after November 20, 2018.
- They’re inheriting an asset attached to the debt. That may be an heir who is inheriting a house that has an outstanding mortgage. In this case, they’ll need to take over the mortgage payments to keep the house.
- They live in a state with a filial responsibility law. Some two dozen states can require adult children to help pay for a parent’s care if that parent is poor or unable to afford a lawyer. Outside of Pennsylvania, they’re rarely enforced.
- They live in a community property state. If you live in a community property state, you may be responsible for a deceased spouse’s debts (even if the account is only in their name).
People often become an authorized user on someone else’s account in order to build credit (a practice known as credit piggybacking). If someone is an authorized user and the primary account holder dies, the debt does not pass on to them.
How to protect your family from your debt
There are steps you can take now to protect your family from your debt after you’re gone. Here are three worth considering.
Life insurance
Buying a life insurance policy and naming a beneficiary can leave your loved ones with a cash payout after your death.
- Term life insurance lasts for a set time period and usually costs less than a cash-value policy.
- Cash-value life insurance lasts for the rest of your life and accumulates a cash value that you can draw on while you’re alive.
A death benefit paid to a named beneficiary typically passes outside the estate, beyond the reach of creditors.
Estate planning
This involves planning ahead for your finances and assets. A strong estate plan typically includes the following.
| Estate planning document | What it does |
|---|---|
| Last will and testament | Outlines how you’d like your assets to be distributed after you’re gone |
| Living will | Outlines your medical care directives and end-of-life care wishes if you’re incapacitated |
| Power of attorney | Clarifies who you would like to make financial and medical decisions for you if you’re unable to advocate for yourself |
A will is the document a probate court follows. What keeps assets out of probate is naming beneficiaries on your accounts and life insurance, holding property jointly, or setting up a living trust. A good plan moves what it can outside the court process and gives clear instructions for what’s left.
Paying down debt while you can
Even if you’ve made all the proper arrangements, your debts may still need to be paid by your estate after your death. That can leave less for your loved ones to inherit.
A plan that can help you pay down your debt starts with three key steps:
- Take stock of what you owe. Take note of all your balances, interest rates, and minimum payments.
- Choose a debt payoff strategy. That might be the debt avalanche method, which prioritizes whichever account has the highest interest rate, or the debt snowball that puts your lowest balance first. Either way, you’ll want to continue making your minimum monthly payment on all your other accounts.
- Consider a balance transfer or debt consolidation. This involves moving your debt onto another account. That could help you save on interest or reduce your monthly payment. You might take out a debt consolidation loan or look into a balance transfer credit card that has a 0% introductory rate.
Bottom line
What happens to your debt depends on the type of debt, whether anyone cosigned or co-owned the account, and what state you live in. In most cases your estate handles it: secured debts get paid first, then unsecured accounts, and if the estate runs short, some balances go unpaid.
The exception is anything with another name attached. A cosigned loan, a joint account, or a community property state can leave a spouse or family member on the hook. And that's the part worth sorting out while you can still do something about it.
Strong credit is what makes that possible. Refinancing a cosigned loan into your own name, or qualifying for something without needing a cosigner in the first place, both come down to your credit file. The Kikoff Credit Account reports your on-time payments to all three credit bureaus, with no hard credit check and plans starting at $5 a month.
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Disclaimer: The information provided in this blog post is meant for informational purposes only and does not constitute financial advice.
