What Happens to Debt When You Die?

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

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.

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:

1. Take stock of what you owe. Take note of all your balances, interest rates, and minimum payments.
2. 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.
3. 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.