What Happens to Debt When You Die? (and How Life Insurance Can Help)

This guide walks you through what happens to debt when you die. Here, we'll answer your questions about debt after death, and explain how life insurance can help protect you from creditors.

Who is responsible for your debt when you die?

It's a simple question with a nuanced answer. However, not all debts are forgiven at death. 

Different types of debts have unique rules attached to them regarding responsibility. Depending on the structure of the loan, your spouse, co-signers, and sometimes your estate, beneficiaries can be responsible for debts. 

Scenarios where others may be responsible for your debt at your death

Debt doesn't explicitly pass to a beneficiary. However, others could be held responsible for your debt upon your death, including     

• Any co-signer on a debt, whether a mortgage, car loan  or personal loan
• A spouse in one of the nine community property states where assets are split evenly
• A spouse in states that require the repayment of certain debts, like healthcare costs
• Those legally responsible for resolving an estate if state and probate laws weren't accurately followed

Secured vs unsecured debt

There are two primary types of debt - secured and unsecured. A secured debt is tied to an asset, like a home or car, and the lender has the right to repossess the property to pay off the balance owed. Unsecured debts, like credit cards and unsecured personal loans, aren’t tied to an asset.      

The role of your estate in debts after you die

If you have unsecured debt, creditors also have the right to collect on the debt from your estate upon your passing. Consequently, your estate's assets must first clear debts before beneficiaries can take control. At times, estate beneficiaries must sell off the estate's assets, such as a home or vehicle, to pay for the debt.

Mortgage debt after death

There are three main scenarios for mortgage debt after your death:

• A spouse or co-borrower on the loan becomes responsible for the mortgage payments. They can choose to take over payments and retain possession of the property until the mortgage is paid in full or sell the property to pay the balance owed. If the home loan is current at the time of sale, the spouse or co-borrower keeps any funds that remain after the outstanding loan balance and closing costs are covered.
• A spouse or co-borrower on the loan becomes responsible for the mortgage payments. However, they can't make the payments and default on the loan. The property is foreclosed and reverts to the lender. 
• If there's no surviving spouse listed on the mortgage, the estate's beneficiary can take over the mortgage payments to retain ownership of the property. They may choose to do so for as long as they wish, either until the loan balance is paid in full or until they use proceeds from a property sale to pay off the mortgage balance. If the beneficiary of the property fails to make payments on the loan, the lender can take possession.     

Credit card debt after death

Here's what to expect with credit card debt after death: 

• The joint-owner on the account takes responsibility for existing credit card debt.
• For accounts without a joint-owner, credit card companies can attempt to recoup the debt through the estate's assets. 
• In cases where there are no assets, the debt isn't passed down, and the credit card company writes off the delinquent balance as a loss.  

Car loan debt after death

When you pass away, auto loan debt, is treated like a mortgage:

• A loan with a spouse or co-borrower: That person becomes responsible for the payments and remaining balance.               . 
• In situations with no co-borrower or spouse, the estate's beneficiary must decide if they want to pay off the remaining loan balance, continue paying the monthly loan payments, or surrender the vehicle to the lender.      

Student loan debts

If you have federal student loan debt, it is discharged when you die. However, private student loan   debt is treated like credit card debt: First, any co-signer on the loan becomes responsible. If there's no cosigner, the lender attempts to recoup payment through the estate's assets. 

What happens to medical debt after your death? 

Medical bills don't always go away upon your death. When a child passes away, the parents are held responsible for medical debt. Meanwhile, the debt of an adult can be passed to the estate and, in some states, to a surviving spouse. 

Approximately 30 states have a filial responsibility law requiring long-term care debt to be paid by the family. It's best to understand your medical expense level and your state's laws, knowing your estate will likely be held responsible. 

How life insurance pays off debt

Creditors can't touch your life insurance benefits. And that helps your beneficiaries. 

In cases where your home must be sold to pay for other debts, whether credit card, personal loans, or medical bills, a life insurance policy can provide cash to cover the debts and allow your beneficiary to take ownership of the home. 

If your life insurance policy is enough to cover all debt and outstanding mortgage, your family won't have to worry about creditors calling or managing a monthly mortgage payment. 

A simple rule for the amount of coverage needed in your life insurance policy is D.I.M.E. Simply add together any debt, lost income, your mortgage balance, and future education expenses for surviving children. This amount of coverage could protect your family financially in the event of your passing. 

Explore life insurance 101 with Ethos Life and learn how a policy protects your family. Get a quote today for life insurance online and access our easy-to-use calculator to calculate your coverage needs.