Death and debts are the last things you want to think about. Unfortunately, they are related. Nearly 75% of Americans die with unpaid debts, such as credit card balances, mortgages, car loans and student loans. How this debt is handled after death depends on the type of debt and where the person lived. Here’s what you need to know.
Key points to remember
- Nearly 75% of Americans die with unpaid debt.
- Debt does not always die with the borrower. Co-signers, co-account holders and spouses may be required to repay it.
- Life insurance is a way to help your family pay off the debts you leave behind.
Who is responsible for your debt after your death?
It’s a morbid thought, but when you die, your debt can live on after you. If you die, your debt generally becomes the responsibility of your domainwhich includes all the property and assets you owned.
Your estate will enter approval, a court-supervised process that identifies and collects your assets and pays off your debts. If there is money left over after paying the outstanding debt, the remaining assets are distributed to your beneficiaries.
In general, no one else is responsible for paying off your debt after your death, with a few exceptions:
- Co-signer: If you had applied for a loan from a co-signerthis person is usually required to repay the debt.
- Joint account holders: If you had a joint account, such as a shared credit card with a family member, the joint account holder must pay off the debt.
- Joint: In some states, spouses are required to repay certain forms of debt. In joint property states, the surviving spouse may be required to use community property to repay their partner’s debt. Community-owned 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’s how some common types of debt can affect your estate and your heirs.
Car loans
Car loans are secured loans, and the car you buy with one serves as collateral. After your death, your estate will have to repay the car loan. If there is not enough money to cover the debt, the lender can repossess the vehicle unless a family member or friend takes over the monthly payments.
Credit card
Credit card balances can only be inherited if you had a joint account holder. However, your estate will have to pay your balances before your heirs can get the money.
Mortgages
If you die and have an outstanding home loan, your surviving spouse (if applicable) can take over the payments. Other heirs can inherit the house but will not inherit the mortgage; they cannot be held legally responsible for making payments. However, this does not mean that the mortgage disappears. The mortgage will have to be paid out of your estate, or the house will have to be sold. The money left over from the sale after settling the debt will go to your heirs.
Student loans
If you have federal student loans and you die with an outstanding balance, your family can apply for a loan discharge due to death. Federal loan discharge applies to all direct loans. For MORE ready- a form of federal loan that parents take out on behalf of their undergraduate children – the loan is canceled if the borrowing parent or student dies.
If you have private student loans, the rules can be more complicated. Release conditions may vary from lender to lender. Although some lenders, such as Sally Mae and RISLAwill pay off the debt if a student borrower dies, some don’t, and your estate will have to repay the loan.
Starting in 2018, lenders must release student loan co-signers if the primary borrower dies. However, the primary borrower is generally responsible for continuing to make payments if the co-signer dies. If you are unsure of your lender’s terms, review your loan promissory note or contact your lender or loan officer discover.
Important
Having enough life insurance to cover your debts is one way to protect your family financially.
How to protect your family
If you have a debt, like a mortgage or a student loan, and you’re worried about how your family could afford to pay it off if you die, a life insurance policy could help. If you have life insurance and you die, your beneficiaries will receive the death benefit. They can use the money to pay off debts, cover your funeral expenses, and pay for living expenses.
When you’re young and relatively healthy, life insurance premiums can be inexpensive. For example, a $250,000 term life insurance policy for a healthy 25-year-old woman costs about $12 per month, on average. Get quotes from best life insurance companies to find the lowest fares.