April 16 2021

What Happens to Your Debt When You Die?

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What Happens to Your Debt When You Die?

After you die, your debts will be paid by your estate. Generally, your family is not responsible for paying off your debts, unless they co-signed on any loans or jointly own any of your accounts.

Note: Laws related to debts after death vary by state, and the following is general information rather than legal advice. Please consult an attorney who specializes in probate and estate planning for details about your specific situation.

It’s burdensome enough to be saddled with debt throughout your life, but what happens to your debt when you die? With the average American holding on to more than $90,000 in debt, it’s important to understand what happens to the money you owe after death.

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Debt does not disappear after you die, so the assets from your estate will be used to pay the creditors you owe. Fortunately, your family is usually not on the hook for your debts, though there are exceptions in the cases of co-signed loans or joint accounts.

Read on to learn specifics about how debt is taken care of when you die, including information about specific kinds of debt and “community property” states where spouses are responsible for each other’s debts.

How Debts Are Paid After Death

Settling your debts after death is part of a larger legal and financial process. After your death, your assets are handled according to the plans laid out in a will or trust.

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In the case of a will, the assets are handled through a legal “probate” process. Generally, this means that your will is proved to be valid in court by an executor, who is the trusted person you elect to handle your property when you pass away. With a valid will, courts begin the process of determining the value of your “estate,” which is simply everything that you own at death.

In the case of a trust, your assets are also accounted for and divided among beneficiaries, but the probate process is not necessary.

The money in your estate will be used to pay off your debts before any remaining assets are given to your spouse or children. If your net worth is negative, meaning you owe more than you own, creditors will determine priority for payment, then the remaining debts will be forgiven — unless you are married in a “community property” state, which we’ll explain below.

Does Your Family Have to Pay Your Debts After You Die?

In most cases, your family is not responsible for your debts after you die. If your estate does not have enough money to pay off your remaining debts, the balance is simply forgiven and the creditors are out of luck.

That said, there are several situations in which your family would have to pay your debt:

Joint accounts: If you have a joint account with a member of your family, any debt in the account will become their responsibility. (Note, however, that this usually does not apply to authorized users.)
Co-signed loans: When your family members co-sign a loan with you, they agree to an equal responsibility for payment, so they will still need to pay the loan back if you die.
“Community property” states: Several states consider all assets and debts acquired during marriage as “community property,” so if one spouse passes away, the other is responsible for their debt.

Specific situations can vary dramatically, so you’ll want to consult an estate or probate attorney in your state for specific recommendations regarding your estate.

While “community property” states vary in their implementation of estate law, all of them agree that debts taken on during marriage belong to both partners, regardless of who signed. Importantly, debts acquired prior to marriage do not count as shared by spouses in any state.

Below, we have a map showing details of which states currently have community property laws.

Understanding your state’s status with respect to shared debt is helpful for making financial decisions that may affect your spouse after you die. And because of the complexity of the probate process, it can be helpful to take a look at how specific kinds of debt are handled after death.

How Different Types of Debts Are Handled When You Die

While the money from your estate will always be used to pay off your debts after you die, it can be helpful to have a detailed understanding of how specific types of debt are handled.

How Specific Debts Are Handled After Death
Type of Debt	Notes
Medical Bills	Medical bills are typically paid first during the probate process, so other debts may not be paid at all if there isn’t enough in the estate.
Mortgages	If your house is not paid off and there is no co-signer, your heirs will need to refinance the loan in their own names. Otherwise, the house will go into foreclosure.
Car Loans	Like houses, cars are the responsibility of any cosigners. If the car is not paid off and there is no co-signer, the loan servicer may repossess the vehicle.
Credit Cards	If you have any joint lines of credit, the other account holder will be responsible for paying. Otherwise, the debt will be paid by your estate.
Student Loans	Federal student loans are forgiven upon death, but someone must contact the loan servicer. Private student loans must be paid by your estate.

Of course, there are many other kinds of debts, so you’ll want to consult an estate attorney to make specific plans for your financial future. In general, debts are paid by your estate in a common law state or your surviving spouse in a community property state.

Regardless of how much financial planning you’ve done, making a plan to get out of debt is a wonderful way to improve your quality of life now and increase the amount of wealth you can leave for your family when you’re gone. Start by making a budget, which is a great first step to a newfound sense of financial control.