- In most cases, your estate is responsible for paying off your debt when you die, but there are some exceptions, so it's important to understand the context of your situation.
- State laws typically dictate what creditors can and can't take from an estate.
- Consult with an estate planning attorney to ensure that your loved ones are protected and that they understand their rights.
It's common for people to want to pass something along to their loved ones when they die, but debt generally isn't one of those things.
In some cases, a debt you've incurred may be automatically forgiven in the event of your death. But in others, your estate may be on the hook to pay it, which can mean less money and more headaches for your heirs.
As you work out your estate plan, consider what happens to debt when you die and what you can do to protect your loved ones' inheritance.
Inside this article
What happens to your debt when you die?
In most cases, the debt will be passed on to your estate, which uses any assets you left behind to pay your creditors. If you have more debt than assets, any remaining debt is typically forgiven.
"Even if there is unpaid debt left, your heirs and beneficiaries typically will not be required to take on responsibility for that debt," says Patrick Hicks, head of legal for Trust & Will, an estate planning company.
But there are some exceptions to that rule:
You have federal student loans: With federal loans, the debt is automatically discharged if the borrower dies. This is also true if the student for which a parent took out Parent PLUS loans dies. Private lenders are not required to discharge debt upon death, but many lenders offer it.
You live in a community property state: If you live in a community property state and took out the debt while married to your spouse, they may be responsible for it after your death.
You applied with a cosigner: Cosigners agree to pay off the debt if you can't, and that applies in the event of death. If you have a cosigner on a private student loan that you took out after November 20, 2018, they'll automatically be released from the loan when you die. For loans disbursed before that date, though, the co-signer may be responsible for payment.
You're a co-borrower: If you took out a loan with a co-applicant instead of a cosigner—such as in the case of a mortgage loan—your co-borrower would be responsible for continuing to pay the debt.
You live in a certain state: Some states may have laws that require the parents or spouse of someone who has died to cover certain types of debt, such as medical bills.
You were the authorized user on a credit card: Alive or dead, any debt you incur as an authorized user on a credit card is the responsibility of the account owner.
Your state requires estates to pay survivors first: In some states, heirs get the first claim on the assets of an estate. In this case, there may be no money left over to pay off your debt, so it'll be discharged.
You're on the deed for a home but not on the loan: If you're a joint owner of a home with your name on the deed, but you're not a co-borrower on the loan, you're not required to pay off the debt. However, you may wish to take over the debt, so the lender doesn't foreclose on the property.
You have secured debt: Unsecured debt is typically forgiven if the estate can't pay it. But if you have a secured loan backed by collateral, such as a car loan or mortgage loan, the lender will typically seize the car or home and sell it to satisfy the debt.
It's important to understand your debt situation so that you can prepare your loved ones for what will happen with it when you die.
Is it possible to inherit debt?
In some cases, a spouse or an heir can inherit debt that you incurred. As previously mentioned, this is common in community property states, where certain marital debts are shared regardless of who the borrower was.
However, it can also happen in the case of secured debt, such as an auto loan or a mortgage loan.
With these types of debt, the estate remains responsible for paying off the balance. But if the estate doesn't have enough money or the person inheriting the home or car chooses to keep it, the debt will typically be passed onto them.
In the event that the estate can't pay the debt and the heir doesn't want to keep the home or car, they can choose to sell it, use the proceeds to pay off the debt and keep any cash that remains.
If the estate and the heirs choose not to pay off the debt, the lender can repossess the vehicle or foreclose on the home to recoup its investment.[5, 8]
What rights do survivors have?
If you die, the Fair Debt Collection Practices Act allows debt collectors to contact your spouse, guardian, executor, administrator, parents (if you're a minor when you die) or any other person who has the power to pay debt from your estate and discuss an outstanding debt.
Additionally, they can contact other relatives or anyone else connected to you, but only to obtain the contact information of someone who has the authority to pay the debt. They can't discuss the debt itself.
"Some lenders may try to get the heir to take over the payments on the debt, even if the heir is not legally responsible," says Hicks. "Unfortunately, it is possible that an heir can start making payments and be deemed to be responsible as a result. So the best way to protect heirs is to make sure they only pay the debts they are responsible for."
Meet the Expert
Hicks has worked as an attorney since 2011, specializing in estate planning. He earned a J.D. from Washington University in St. Louis School of Law.
If you want a debt collector to stop contacting you, send a letter requesting it. At that point, the agency can only contact you to confirm that it'll stop reaching out to you or if it plans to take specific action against you or the estate, such as a lawsuit.
What creditors can and can't take from the estate
While creditors can demand payment from your estate after you die, not all of your assets are up for grabs. Depending on where you live, there may be statutes that exempt certain assets. Contact an estate attorney to understand what's protected and what isn't for your state.
Additionally, creditors typically cannot go after your life insurance death benefit or your retirement accounts, though there may be some exceptions based on the situation. But more often than not, those funds will go to your beneficiaries even if the estate doesn't have enough money to pay off your debts in full.[7, 9, 10]
Also, note that some creditors may not even try to seek payment from the estate.
"The burden is on the lender to seek repayment of the debt," says Hicks.
This process can vary from state to state, and if the creditor's claim is filed late or doesn't meet the requirements set by the state, it can be denied, he adds.
"Some lenders may even waive small debts or credit card balances as it may not be worth the effort to try to collect," Hicks says.
How to protect your estate and loved ones from creditors
Life insurance proceeds and retirement funds are naturally shielded from creditors, but another step you can take to protect your assets from being taken is to set up an irrevocable trust.
Trusts cannot be included in the probate process, so they won't go on the public record, and because assets held in the irrevocable trust are owned by the trust and not you, they're generally protected from your creditors.
Keep in mind, though, that once you set up an irrevocable trust, you generally can't make changes or take back the assets. So, you'll want to consider this only if you're certain that you don't want to retain ownership of the assets.
In contrast to an irrevocable trust, assets held in a revocable trust, which the owner can make changes to while they're still alive, will bypass probate but they won't be protected from creditors.
Additionally, trust law can be complicated, so it's a good idea to consult with an estate planning attorney who can help you navigate the process and ensure that your loved ones get the most money possible when you die.