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What Happens To Your Debt When You Die?

5-minute readMay 25, 2021

Let’s be honest: none of us really wants to ponder our own mortality.

However, it’s important to at least plan for the unexpected if you want to protect the loved ones you would leave behind if the worst were to happen. This is especially true when it comes to finances and any debt that you currently carry. 

By educating yourself on what happens to debt when you die, and knowing which balances could come back to haunt your family, you can ensure that they are covered no matter what. This allows you to plan ahead and buy adequate life insurance if needed. That way, your loved ones aren’t left holding the bag if your estate can’t cover the balances due.

Let’s take a look at what happens to your debt after you pass away, and how you can best prepare.

When Someone Dies, Does Their Debt Go Away?

Let’s say that you alone opened a credit card. You alone decided to get a mortgage on a home. And you alone borrowed money for college.

The accounts undoubtedly belong to you, so why should someone else be responsible for that debt if you died? Shouldn’t the balance simply go away if you suddenly ceased to exist?

Unfortunately, even if you were to pass away, it doesn’t mean that your debt follows you. Your estate will remain responsible for most of what’s owed even in your absence, leaving your loved ones to sift through the balances.

There are some debt types that are forgiven in the event of your death (which we will talk about in a moment) but by and large, your lenders will notgo away quietly if you die.

Does Credit Card Debt Die With You?

When you take out a mortgage, your new home secures that debt. When you take out an auto loan, your car is considered collateral for the balance due. But what about revolving credit card balances?

Your credit card debt is considered unsecured, meaning that the issuer has no collateral to confiscate if the balance goes unpaid. This puts your credit card issuer in a sticky situation if you pass away while still owing them money: sometimes, they are unable to collect and your credit card debt does indeed die with you.

However, this is only true in cases where:

  • you do not leave behind an estate or your estate is not valuable enough to cover the balance due; and

  • no one else has cosigned for the debt. 

Your credit card issuer will file a claim against your estate after your death, in an attempt to satisfy the debt you left behind.

If your estate is able to cover the balance, it will be legally obligated to do so. If there is a co-borrower on the account (authorized users are safe and don’t fall into this category), they may be held responsible for the remaining balance.

However, if no one else has cosigned on the account and your estate is depleted by the time your credit card issuer tried to collect, they may simply be out of luck.

Is Family Responsible For The Deceased’s Debt?

When you pass away, your remaining debt will be the responsibility of your estate. It doesn’t get “passed down” to your loved ones.

However, there are some instances where family members can be held responsible for debt that the deceased held, but the circumstances vary based on the type of account and which family members we are talking about.

Here are a few common examples.

Responsible By Proxy

Your estate is held accountable for your remaining debt balance(s) when you die. Any money owed will be satisfied by your estate during probate, before the remaining assets are disbursed to your beneficiaries. 

Why is this important?

Let’s say you planned to leave $100,000 in assets to your two children, both of whom would receive $50,000 upon your death. However, you die suddenly with an outstanding balance of $40,000 on your credit cards.

This debt won’t disappear; instead, it will be paid first by your estate. This would obviously cut into the amount that your children would have otherwise received. Rather than both of them getting $50,000, they’ll now receive only $30,000 … indirectly holding your children’s inheritance responsible for your debt.

Co-Responsible

If you cosigned on a home mortgage, auto loan, personal loan, or credit card with someone else, your co-borrower will typically be responsible for any remaining balance after your death. This holds true even if there is nothing left in your estate after probate.

Additionally, if a parent(s), spouse, or other party cosigns with you on a private student loan, they will usually remain responsible for the balance after your death. There are some exceptions to this, but each private lender handles the situation differently.

To add a little salt in the wound: the death of one co-borrower on a private student loan can technically trigger a default in some cases. This auto-default could prompt the lender to demand the entire balance due immediately from the surviving borrower.

When The Debt Actually Does Die With You

There is a silver lining here, though: a handful of balances canactually “die with you.” But they are few and far between.

The most common of these involves federal student loans.

If you pass away, your federal student loan debt will be discharged, meaning that neither your loved ones nor your estate will be responsible for the balance due. This includes Parent PLUS loans, as well, even though they technically have a surviving cosigner.

These are handled very differently from the private student loans mentioned above, which may be discharged, claimed against your estate, or passed on to your co-borrower, depending on the lender and loan terms.

Final Thoughts

No matter how uncomfortable it may be, it’s important to think about the financial impact that your death would have on the loved ones you’d leave behind. 

Of course, your plan should be to get out of debt as quickly as possible, so your family doesn’t even have to worry about balances owed.

If you’re still working toward this goal, though, consider options like purchasing term life insurance to fill in the gap. 

Unfortunately, the debt you carry today won’t simply follow you into the grave. However, it’s nice to know that these balances don’t get unexpectedly passed down to those you leave behind, either. 

For more articles on personal finance, visit Rocket HQSM’s Learning Center.

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