What Happens to Your Debt When You Die? (2024)

When you die, your loved ones usually are not responsible for your debt. However, in some cases they may be. You can die with outstanding debt, such as credit card balances, mortgages, auto loans, and student loans.How that debt is handled after your death will depend on the type of debt and where you lived.

Who Is Responsible for Your Debt After Your Death?

When you die, your debt may live on after you. If you pass away, your debt typically becomes the responsibility of your estate, which consists of all of the property and assets you owned.

Your estate will enter probate, a court-supervised process that identifies and gathers your assets and pays off your debts. If there is any money left after paying outstanding debt, the remaining assets are distributed to your beneficiaries.

In general, no one else is responsible for repaying your debt after you die, with a few major exceptions:

• Cosigner: If you had applied for a loan with a cosigner, that person is typically obligated to repay the debt.
• Joint account holders: If you had a joint account, such as a credit card shared with a family member, the joint account holder must repay the debt.
• Spouse: In some states, spouses are required to repay some forms of debt. In community property states, the surviving spouse may have to use community property to repay their partner’s debt. Community property states include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

4 Types of Debt Your Loved Ones May Have to Repay

Here is how some common types of debt can affect your estate and your heirs.

Auto Loans

Auto loans are secured loans, and the car you purchase with one serves as the collateral. After you die, your estate will have to repay the car loan. If there isn’t enough money to cover the debt, the lender can repossess the vehicle unless a family member or friend takes over the monthly payments.

Credit Cards

Credit card balances cannot be inherited unless you had a joint account holder. However, your estate will have to pay off your balances before your heirs can get any money.

Mortgages

If you die and have an outstanding home loan, your surviving spouse (if any) can take over the payments. Other heirs can inherit the home but will not inherit the mortgage. They can’t be held legally responsible for making payments. However, that doesn’t mean the mortgage disappears. The mortgage will have to be repaid from your estate, or the home will have to be sold. Any money that's left over from the sale after satisfying the debt will go to your heirs.

Student Loans

If you have federal student loans and die with a balance still outstanding, your family can apply for a loan discharge due to death. Federal loan discharge applies to all direct loans. For PLUS loans—a form of federal loan that parents take out on behalf of their undergraduate children—the loan is discharged if either the parent borrower or the student dies.

If you have private student loans, the rules can be more complicated. Discharge terms can vary from lender to lender. Though some lenders, such as Sallie Mae and RISLA, will discharge the debt if a student borrower dies, not all do. Your estate will have to repay the loan.

Lenders must release cosigners from student loans if the primary borrower dies. However, the primary borrower is usually responsible for continuing to make payments if the cosigner dies.If you aren’t sure about your lender’s terms, review your loan promissory note or contact your lender or loan servicer to find out.

Tax Considerations

When thinking through what debts are discharged upon death, there may or may not be tax considerations to plan ahead for. If you're particularly interested in this aspect of discharged debt, consider discussing your specific situation with a tax expert.

If a debt is discharged due to death, it may be considered income to the deceased person's estate. There are exceptions and exclusions that may apply if the debt is being discharged as part of an insolvency or bankruptcy filing. However, discharged debt may still be considered taxable.

If a creditor forgives a debt, they may issue a Form 1099-C to the debtor or the debtor's estate, reporting the canceled debt as income. In addition, state laws may also impact the tax treatment of discharged debt for local tax implications.

How to Protect Your Family

If you have any form of debt, such as a mortgage or student loan, and are worried about how your family would afford to repay it if you died, a life insurance policy could help. If you have life insurance and pass away, your beneficiaries will receive the policy's death benefit. They can use the money to pay off debt, cover your funeral expenses, and pay for their living costs.

If you're worried about your debts after you pass, you can also create a more robust, comprehensive estate plan. This may include a will or a trust, and can outline how you want your assets distributed. Though your will can't just discharge debts on its own, it can help your family plan for the debts they must carry or settle.

On the theme of planning ahead, there may be strategies around joint accounts or co-signing loans. In some cases, it may make more sense to just add a beneficiary as opposed to having multiple parties jointly in charge of certain types of debt.

The Bottom Line

When you die, your estate will be responsible for paying off your debts, usually not your loved ones. However, in some cases, other people may be responsible for your debt, such as if you have a co-signer on a loan. Depending on the state, your spouse may be responsible for paying the loan. Consider consulting a professional financial advisor who can review your state plans and help you stay on track toward your goals.