In an ideal world, our debts would be wiped clean once we passed away. Unfortunately, this is not usually the case. In reality, the process of dealing with debt after someone dies can get a bit complicated. Depending on the type of debt and the situation, debts may be discharged, collected through other methods, or fall on the co-signer or joint account holder.
In this article, we’ll explore some of the details of repayment methods and debt types.
When an individual dies, any debts that they leave behind will remain, and become the responsibility of the person assigned to deal with their will and estate. This person is known as the estate’s executor. This person, often referred to as the executor, will use the remaining assets to satisfy outstanding debts. This can be done in a few different ways:
If these options don’t produce enough funds to cover the debts, creditors typically have no way to recover what they’re owed. However, there are certain debts that transfer to other individuals when someone passes. Before we move on to those, it’s important to note that before you pay off any loan, it’s important to read the fine print or speak with the lender first, so you don’t end up facing unexpected prepayment penalty fees.
These two types of debt (home equity loans and mortgages) will typically transfer to anyone listed as a joint owner or the inheritor. In the case that there is no joint owner on a mortgage, the remainder can be paid from the estate funds, or the person who inherits the home can take on the payments.
For home equity loans, the person who inherits the house is expected to pay the loan back. Depending on the lender, they may want the inheritor to pay it in full, or they may allow them to take on the payments. When a lender expects full, immediate payment, it may force the individual to sell the home.
Credit cards fall into the “unsecured” debt category. This means that creditors can’t pursue the balance owed if the estate doesn’t have the assets to cover them. However, if the credit cards list a joint account holder(s), they will be held responsible for the remaining balances. This doesn’t apply to individuals who are only authorized users - only joint account holders.
Some jurisdictions with community property laws hold spouses responsible for credit card debts after death.
Auto loans fall into one of the simpler debt categories. Any remaining balance on an auto loan can be paid from the profits or assets of the estate. If there aren’t enough funds or if the executor doesn’t make the payments, the lender will then likely repossess the car. In some cases, the person who inherits the car can choose to take over the payments and satisfy the remainder of the loan agreement.
Student loans also fall into the category of unsecured debts, like credit cards. If the estate doesn’t have sufficient assets to pay them off, the lender is out of luck. However, if the loan has a co-signer, this person will be responsible for repaying the remainder of any private student loan debt. In community property states (the same ones listed under credit card debt), the surviving spouse must take them over if they were obtained during their marriage.
There are a few exceptions to these rules, making student loans one of the more complicated categories. Federal student loans are usually discharged when the owner passes away. Certain private student loan lenders will also forgive the debt. Wells Fargo and Sallie Mae are two notable examples of lenders that will waive debts after death. In the case of Federal Plus loans, they may be forgiven if either the student or the parent dies.
Regardless of when your lifespan may come to an end, it is important to keep your debts under control. Not only will proper debt management help to improve your quality of life, but it will make things easier on your estate and loved ones when you pass away. Also, don't underestimate the value of creating a last will and testament that provides specific guidance on how you wish your estate and other assets to be divided or allocated upon your death.
Taking the appropriate efforts now to set a budget and live within your means, and preparing a will that outlines your final wishes, will help avoid a potential financial mess down the road.