What Happens to Debt When You Die?

Most Americans carry some debt, whether a mortgage, student loan, credit card balance, medical bill, or other obligation. When they die, one of two things could happen:

• Payment: Debts are typically paid from your estate. An “executor” is appointed by you in your will (or by someone else, if necessary) to manage your estate as a legal entity, combining everything you own and everything you owe. The executor tallies up your assets in the form of cash and property, pays your debts (in some cases, by selling property), and distributes any remaining assets to heirs and other beneficiaries. Depending on the state where you live, this process, called “probate,” can take a few months or a couple of years.
• Nonpayment: If your debts are higher than the value of your estate, whatever you cannot pay is usually voided, with the companies you owe writing off the loss. 

In either the payment or nonpayment scenario, the executor has to pay some types of creditors before others, until running out of funds. For example, funeral expenses and estate taxes, if any, might be given priority. And secured loans (backed by your house, car, or other collateral) usually take precedence over unsecured credit card debt and personal loans. So, credit card debt is at the back of the line, but before your heirs and other beneficiaries.

You or your heirs may find, however, that the basic rules don’t apply to you. Some types of accounts are treated differently than others. Regulations can vary by state. Your estate lawyer may have drawn up legal documents such as trusts, written to change what happens to your debt when you die. Here are some different circumstances:

• Joint or cosigned accounts: If your spouse or someone else has jointly taken out a mortgage or other loan with you – or cosigned your personal loan or other account – they may still be responsible for the debt when you die.
• Community property: A handful of states, including big ones like California and Texas, have community property laws. This means that spouses own and owe almost everything equally, even in death. Unless there is a written agreement to the contrary, your surviving spouse could be responsible for paying back your debt, no matter whose name is on the account.² In the rest of the 50 states, creditors cannot automatically collect your debt from your spouse.³
• Student loans: Federal student loans are usually erased if the student or parent who took out the loan dies.⁴
• Retirement accounts: If you designate an heir or other beneficiary on your IRA or 401(k) documents, funds in those accounts would not be available to creditors.
• Home loans: Your beneficiary would be responsible for any home equity loan on a house that you leave to them – for example, taking over monthly payments. In case of a mortgage, whoever inherits a house would also have to take over monthly payments if they want to keep the house.
• Trusts and insurance policies: Working with an estate lawyer, you could place some of your assets in a trust, a legal ownership change that might shield the assets from creditors.⁵ Life insurance policies may also be shielded.

Upon your death, a family member or the executor would need to notify creditors, by sending them a copy of your death certificate. The creditors, in turn, would inform the major credit bureaus, for reasons including fraud prevention. Credit bureaus could also be contacted directly to update your credit report.

Collectors have only limited rights to contact your relatives or executor under the Fair Debt Collection Practices Act. Still, collection agencies have been known to pursue payment of a deceased person’s debts, regardless of the circumstances. Family members who are informed about the basics and exceptions above are better equipped to field collectors’ calls, during a difficult time.

If collectors overstep their limits or if a beneficiary wants them to stop calling, the FTC recommends sending the collection agency a letter by certified mail, including “return receipt,” and reporting any further problems to the state attorney general’s office.

On the other hand, if someone owes you money when you die, they are still required to pay – to your estate. 

The day could come when you or your heirs begin wondering what happens to your debt when you die. Most of it is unlikely to be passed on to your heirs. But circumstances vary, so it’s a good idea to read up on them.