What Happens To Someone’s Debt When They Die?

Death isn’t the most enjoyable subject to contemplate, but that doesn’t mean thinking about how financial affairs will be handled after someone passes should be avoided, especially if that person is in retirement or close to it. In fact, if an adult of any age doesn’t have a will, they should probably think about getting one soon.

One of the common questions people have about death involves their debt. What happens to it after someone dies? Does the money they owe on credit cards expire? What about mortgage debt, student loan debt, or unpaid loans?

We understand that thoughts about death can be overwhelming, and while we can’t provide answers to those questions, we can offer guidance on what happens to that debt

Debts don’t disappear when someone dies.

Debt is like the memories of loved ones: it will persist long after they leave this earth. Just because the person who owes a debt passes away doesn’t mean their debt ceases to exist; their creditor is still owed that money.

The question becomes: will they ever be repaid? The answer is: they will certainly try, but it will depend on a few factors.

First, it will depend on who was responsible for the debt. If a person took out a credit card in just their name and they pass away with an outstanding balance on the card, then their heirs will not be responsible for paying it back. A person’s debt doesn’t die with them, but the obligation to repay that debt certainly can.

However, if they took out a joint credit card with their spouse, and one spouse passes away the surviving spouse will be liable for paying off the remaining balance. Since both are listed on the contract they share the responsibility for the debt. This frequently comes into play with home mortgages; one person dies and their spouse is still responsible for repaying the loan. There are exceptions to this rule if the person lives in a “community property” state. More on that below.

Additionally, there’s the issue of the “estate” left behind after someone dies. Unfortunately, dying with a lot of outstanding debt can create challenges for the loved ones left behind.

Debts will get paid back out of the estate.

When a person dies, they usually leave stuff behind. That can include a house, a car, furniture, jewelry, and money in their bank account(s). This is commonly referred to as a person’s “estate” and it is the sum of their net worth.

Their estate will be divided between their heirs - this is where a will comes in handy. However, they are not the only ones who have a claim to the estate. The deceased person’s creditors do as well.

"The good news for the heirs of a decedent is that you cannot inherit a debt unless you were a co-signer on the account,” says attorney Ted Bond, Jr., an expert in estate planning and founder of The Law Offices of Thaddeus M. Bond, Jr. & Associates, P.C. “This does not, however, mean that the debt simply goes away because a person passes away. When a person dies, they leave behind an estate which constitutes all of their remaining income, assets, and liabilities. If the estate has sufficient funds to pay the debts, they must be paid. If the estate has insufficient funds, the debts are canceled and do not transfer to the family of the person who passed away."

While it’s impossible for a debt to be passed from parent to child, it is very possible that a debt can cancel any inheritance that the child would stand to receive. If someone’s parent(s) died with an outstanding installment loan, payday loan, or title loan, that debt will get paid before the child does. However, some states have protections for the benefits from life insurance policies.

While creditors will generally get the first crack at an estate, there is a hierarchy among creditors. As Bond puts it:

"Certain debts are given priority and must be paid first: funeral expenses, tax debts, or money due to employees of the deceased are common priority claims. The exact order those debts must be paid is dependent upon the laws of the state where the person resided on the day of their death. It is important to know that you cannot expect to receive any type of inheritance until the estate’s debts are paid. Most states have a procedure set up for creditor claims to be filed against an estate which include strict time limits. Final distribution to the heirs cannot take place until those time limits have expired."

If someone lives in a “community property” state the rules for inherited debt are different.

So far we’ve talked about how the only person legally obligated to pay back a given debt is the person (or persons) whose name is on the loan agreement. However, if the person lives in a “community property” state, that’s not exactly the case.

The rules of community property state that a person is responsible for any debt taken out by their spouse during the marriage. This means, for instance, that they would be responsible for any outstanding credit card debt that their spouse accrued while they were married. It also means that they would not be responsible for student loans or personal loans their spouse took out before they got married.

States that observe community property are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Student loans can be a special case. Federal student loans are discharged upon the death of the borrower, but private student lenders will try to collect from the borrower’s estate or will hold the co-signer responsible for repayment.

The less debt a person has, the more money they’ll be able to pass on.

According to a study, 73% of Americans die with outstanding debt, with an average debt load of almost $62,000. So while a person doesn’t have to worry about sticking their heirs with uncollected debts, they should be concerned about those debts eating up their inheritance. The lesser the debt, the more money they can pass on.

Ted Bond, Jr. has been practicing law in his native Illinois for over 25 years. Since founding The Law Offices of Thaddeus M. Bond, Jr. & Associates, P.C. in 1996, he has helped many families with estate planning such as wills, trusts, powers of attorney, and probate court matters. His law firm also tries real estate, family law, and business cases throughout Lake County and nearby areas of northern Illinois.