In this article:
- How Debt Is Handled After Death
- Who Is Responsible for Your Debt When You Die?
- Which Debt Can Be Inherited?
- Which Assets Are Protected From Creditors?
- How to Notify Creditors of Death
Whether it's a mortgage, a car loan or a credit card bill, some people die still owing debts. But what happens to your debt when you die? Any debt that remains after someone dies will either be paid from their estate, paid by a cosigner or left unpaid if there are insufficient funds. Here's a closer look at how different debts may be dealt with after the borrower's death.
How Debt Is Handled After Death
Your estate is a legal term that encompasses everything you own. It includes your savings, your home, your investments and more.
Your estate is distributed in a legal process called probate. If you have a will, a probate court will confirm the document is legitimate. The judge ensures that the executor named in your will distributes your property and pays any taxes you owe.
If you die without a will, a probate court will decide how to split up your estate. The judge will name an administrator to oversee the process and instruct them what to do.
Who Is Responsible for Your Debt When You Die?
When you die, any outstanding debts are classified as either secured or unsecured.
- Secured debt: Secured debt is backed by collateral. If the debt isn't paid, the lender can take the collateral to satisfy the loan balance. Mortgages and auto loans are common types of secured debt, so the car or home you're financing serves as collateral for the loan. If you don't make your payments, the lender can repossess your car or foreclose on your home.
- Unsecured debt: Unsecured debt is not backed by collateral. Credit cards, student loans and some personal loans are common types of unsecured debt.
Both secured and unsecured debts are paid out of your estate.
If your estate can't pay off a secured debt, the property used as collateral might be sold, refinanced or given to the lender to pay off the loan. You can also make arrangements in your will or estate plan to have a trust or other entity repay the secured debt over time.
For unsecured debt, the money and other assets in your estate will be used to pay off the debt.
If your estate doesn't have enough money to pay your debts, your state's laws determine which creditors get paid. Secured debts generally take precedence in this case, so some unsecured debts may not get paid.
Authorized users on your credit cards aren't responsible for paying any outstanding balances after you die.
Which Debt Can Be Inherited?
Certain debts are inherited after you die; others aren't. Inherited debts may include:
- Joint debts: If you took out a loan with someone else, they're responsible for repaying it after you die. Many types of debts can be joint debt; mortgages and car loans are the most common.
- Cosigned debt: When someone cosigns on a loan or credit account, they're agreeing to pay the debt if you don't. If you die and your estate can't repay the debt, your cosigner becomes responsible.
- Home equity loan on an inherited house: If you have an outstanding home equity loan, whoever inherits your house also inherits that debt.
- Debt in community property states: The nine community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (Alaska gives couples the option to make their property community.) If you live in one of these states, your spouse may be responsible for certain debts after you die, even if you're the sole borrower.
- Timeshares: Timeshare owners sometimes add their heirs to the timeshare deed. Anyone else you put on the deed will inherit the timeshare—and the responsibility for its annual maintenance fees.
- Medical debt: Laws in some states hold spouses or children legally responsible for certain types of medical debt.
Which Assets Are Protected From Creditors?
The following types of assets are protected from creditors.
- Retirement accounts such as employer-sponsored 401(k) or 403(b) plans, Solo 401(k)s, SEP IRAs, Simple IRAs, Roth IRAs and health savings accounts are exempt from creditor claims.
- Life insurance payments go to your beneficiaries and don't have to be used to pay your debts.
- Living trusts allow you to pass on property to your heirs and avoid probate. Assets held in a living trust are protected from creditors.
- Brokerage accounts, which are taxable investment accounts held with an investment firm or brokerage, can't be taken by creditors.
How to Notify Creditors of Death
Your loved ones or the executor of your will should notify creditors of your death as soon as possible. To do so, they'll need to send each creditor a copy of your death certificate.
Creditors generally pause efforts to collect on unpaid debts while your estate is being settled. They will also alert the three consumer credit bureaus (Experian, TransUnion and Equifax) of your death. When this happens, the specific account will be marked as associated with a deceased person.
Your spouse or executor can also contact Experian, TransUnion and Equifax directly to inform them of your death and submit copies of the death certificate.
It's also a good idea for the people in charge of your estate to get a copy of your credit report. This lists all your creditors in one place, which can be useful in the probate process and for helping your loved ones notify them of your death.
The Bottom Line
Your loved ones may assume they're responsible for any debts you owe when you die. However, that isn't usually the case. Most debts will be paid out of your estate, and some may go unpaid. Before making any payments, family members should consult an attorney to clarify which debts they do and do not have to pay.
