What Happens to Debt When You Die?

People experiencing mental health emergencies can call, text or chat 988 to reach the Suicide and Crisis Lifeline and get help from a trained counselor 24 hours a day, seven days a week.

Alyssa Chance is an attorney and assistant director in Sophisticated Planning Strategies at Northwestern Mutual.

If you currently have debt—whether a mortgage, car loan, credit card, student loan or something else—it’s natural to wonder what will happen to that debt when you die someday. The specifics will vary from person to person depending on a number of factors, including what kind of debt you owe, where you live and what assets your estate holds.

Below, we take a closer look at how debts are settled when a borrower passes away and how different kinds of debts are treated. We also explain the instances when debt might be passed on to a survivor and answer other common questions.

How an estate is used to settle debts

When you die, your bank accounts, real estate, businesses and other possessions are lumped together to create what’s called an estate. Any assets owned in your own name will then go through a court proceeding known as probate. This will happen whether or not you have established a will. Assets titled in the name of a revocable or irrevocable trust will not go through probate.

During probate, a court will help determine the value of your estate. Your assets will then be used to repay any lingering debts that you owed, according to the specific probate laws of your state. Some debts may be forgiven, but others will need to be paid. Once those debts have been repaid, any remaining assets owned by the estate are split among your heirs.

You can make the probate process a little easier for your loved ones, who’ll need to sort out your finances. Start with an estate planning checklist.

Which assets are exempt from probate?

The good news is that some assets may not count toward your estate at all. These assets are often shielded from claims made by creditors after you’ve died. These can include:

• Beneficiary accounts: Financial accounts with a named beneficiary are typically exempt from probate and pass directly to your beneficiary. Common examples are retirement accounts like 401(k)s and IRAs, life insurance policies and pensions.
• Payable on death (POD) accounts: Certain types of bank accounts—including savings accounts, checking accounts and certificates of deposit (CDs)—allow you to name a beneficiary who is entitled to receive those assets upon your death.
• Jointly owned property with survivorship rights: If you jointly own a piece of property (such as a house) with another person, and that person has survivorship rights, your share of the property will automatically transfer to the other owner upon your death.
• Assets in an irrevocable trust: When you place assets in an irrevocable trust, they are no longer considered your assets. When you die, those assets are distributed to your trust’s beneficiaries according to the terms of the trust.

Assets titled in a revocable trust do not go through probate but may be used to pay creditors’ claims.

What happens to mortgages and car loans when you die?

Mortgages and car loans are known as secured debt because they are backed (or secured) by an asset. A mortgage is backed by the home or property that it was used to purchase, and a car loan is backed by the vehicle.

With this in mind, if you die before paying off your mortgage or car loan, those lenders will typically be entitled to recoup the balance from your estate. If the estate does not hold enough liquid assets (such as cash or investments), this could result in the forced sale of your home or vehicle. Anything left over from the sale once the creditors have been repaid would then go to your estate—and, ultimately, your heirs.

What happens to credit card debt when you die?

Credit card debts are known as unsecured debts. This means that, unlike a mortgage or car loan, they are not backed by any specific assets as collateral that can be sold to pay back the debt.

That doesn’t mean that your credit card bill balance simply goes away when you die. It just means that credit card companies are the last in line to make a claim against your estate before any remaining assets go to your heirs. The person managing your estate is required to send a notice to creditors to file a claim, which is later handled from the estate assets.

That means if there’s money in your estate (maybe the house sold for a lot more than was owed on the mortgage), the court will use that money to pay the debt. But if there’s no money left, the credit card company may not get what it’s owed.

What happens to student loan debt if you die?

What happens to your student loans when you die will depend on whether you have federal or private loans.

• If you have federal student loans, any balances that remain will be wiped away when you die.
• Private lenders, like credit card companies, are allowed to submit a claim against your estate to recoup any outstanding balance you may owe (though some lenders may choose to discharge the debt in a way similar to federal loans).

Things can get kind of murky when a co-signer is involved, though. In those cases, the co-signer will inherit the student loan and will be responsible for paying it back. Sometimes, the death of the primary borrower will trigger an automatic default, which can mean that the co-signer is required to pay off the entire loan balance immediately.

With this in mind, many parents who co-sign private student loans for their children also take out life insurance policies on their children to cover those balances in the unfortunate scenario that the parents outlive their kids.

What happens to medical debt if you die?

Medical debt, like credit card debt, is considered an unsecured debt. This means that it will be paid through your estate.

The only exceptions to this would be if the debt was co-signed, at which point it would transfer to the co-signer, or you live in a community property state, at which point a portion of the debt could pass to your spouse.

Can you inherit debt from your parents?

Generally speaking, no. In most cases, children will not inherit debt from their parents, though there may be some instances when this does happen. One exception is when you co-sign a loan with one of your parents.

The co-signer takes on a legal responsibility to pay back that debt if the primary borrower can’t pay it. This includes when the primary borrower dies. And as noted above, the death of the primary borrower could trigger an automatic default, forcing the co-signer to pay back the entire sum all at once. This applies to any private debt, including mortgages (or second mortgages), auto loans, credit cards, personal loans and other debts.

It should also be noted that if you add your parents to your savings account or checking account, that account becomes subject to probate upon their death, which could result in your money being used to pay off other debts that you didn’t co-sign.

Can you inherit debt from a spouse who dies?

If you live in what’s known as a community property state, your spouse owns one-half of everything you own—including your debt.

There are nine states that fall under this umbrella: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. If you live in one of them, your spouse may be on the hook for any debts you incurred during your marriage. Alaska allows you to choose whether you want your estate to be governed by community property or common law like the rest of the country (there are a number of estate planning reasons why you might choose one or the other).

As noted above, your spouse will also be on the hook for any debt or loan that they co-signed along with you.

Protecting your loved ones

Now that you know what happens to your debt when you die, there are steps you can take to help your loved ones have an easier time when you pass. Some good ideas include:

• Naming and updating your beneficiaries: Make sure that you have named beneficiaries on any account that allows for them, as these accounts will be able to avoid probate and are shielded from creditors. If it’s been a while since you’ve named your beneficiaries or your life situation has changed (for example, you’ve gotten married or divorced), be sure to update them.
• Considering life insurance: If you currently carry a significant amount of debt, consider purchasing life insurance so that the death benefit could be used to pay back any outstanding debt. This can help your heirs avoid being forced to sell a prized possession, such as the family home or collectibles, upon your death.
• Considering an irrevocable trust: If there are any assets that you specifically want to shield from creditors, consider placing them in an irrevocable trust. However, caution should be used since you lose control of any assets that are placed in an irrevocable trust and, generally, cannot access them.

Your financial planner can work with an estate planning attorney to help you make sure that your assets pass to your heirs as smoothly as possible.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^®, CERTIFIED FINANCIAL PLANNER^®, and CFP^® (with plaque design) in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.