Debt After Death: Handling Credit Card Debt, Estate Debt & Medical Bills
One of the most important parts of managing the estate of a deceased person is figuring out what they owe, who they owe, and how these debts will be repaid. Contrary to urban myth, most debts don’t go away when a person dies. Mortgage debt, vehicle loans, credit card debt, and medical bills survive a person’s passing.
Keeping good financial records and considering your debt load when planning for life insurance can help your family and heirs from being overwhelmed by financial challenges when you die.
Key Takeaways
- Most debt survives a person’s death.
- Some types of student loans are forgiven when a person dies.
- If a person’s estate lacks funds to cover credit card balances and many other debts, family members aren’t held responsible.
What Happens to Debt When You Die?
The money you owe creditors doesn’t just disappear when you die. These debts must be settled via your estate and are thus deducted from the amount available to your heirs at your death.
If you have a will, the responsibility for paying your debt lies with your estate’s executor. However, not all debts are handled the same way. How a deceased person’s debts are handled depends on a number of factors, including whether the debt is secured and if any cosigners or joint account holders are associated with the debt.
What Is Secured Debt?
Secured debt is when the borrower pledges an asset as collateral for the loan. This could be real estate or a financial asset, such as stocks. In a secured loan, if the borrower defaults on the loan, the lender has the right to seize the collateral to recover the loan amount. Common types of secured debt include home mortgages or home equity lines of credit (HELOC), vehicle loans, and boat and RV loans.
What Is Unsecured Debt?
Unsecured debt isn’t backed by any type of collateral. It relies on the borrower’s good credit and history of on-time payments to give the lender assurance that the loan will be repaid. Common types of unsecured debt include credit card balances, personal loans, and medical debt. In most states, survivors aren’t responsible for unsecured debt held solely in the deceased’s name[1].
Handling Credit Card Debt After Death
When a person dies, the executor or a court-appointed administrator is responsible for informing any companies that provided credit to the deceased about their passing. The issuer will then freeze the account so no one can take advantage of the chaos surrounding a person’s death.
The money to pay these credit card companies will come out of the cardholder’s estate. If there aren’t sufficient funds to repay these balances, the debt is usually erased and doesn’t pass on to family members.
If the deceased person’s family members or partner are authorized users on an account, they will generally not be able to use the credit card account after the cardholder’s death. In addition, if a cosigner is on an account, they will become solely responsible for the debt after the other signer’s death, whether or not they signed for the individual charges.
Responsibilities for Estate Debt After Death
The executor of the deceased person’s estate has many responsibilities related to settling the deceased person’s debts. These include:
- Notifying creditors of the person’s death
- Filing the necessary paperwork with probate court (if necessary)
- Hiring a probate attorney (if indicated)
- Prioritizing debts
- Managing debt repayment using the estate’s assets
The executor may have to liquidate assets to create funds necessary for these repayments.
Managing Mortgage Debt After Death
If a person dies with a mortgage on their home, the surviving spouse or heir typically needs to pay off or assume the mortgage. It’s essential for the heir and/or executor to promptly inform the mortgage lender about the property owner’s passing and the estate or heir’s intentions regarding the home. Options include refinancing, selling the property, or using other estate assets to pay off the mortgage.
If you want to make sure your heirs gain control of your property, consider adding a whole life insurance policy that will cover the remaining mortgage as part of your estate planning.
Kris Lamey, MBA, Formal Financial Director
Settling Medical Debt After Death
Medical debt generally survives a person’s death. Anything not covered by the person’s insurance must be paid from the estate’s assets. In many cases, it’s possible to negotiate the balance with the healthcare providers or establish an often-interest-free schedule of extended payments.
Dealing With Student Loan Debt After Death
Student loans can sometimes be discharged after a person’s death, depending on the type of loan.
- Federal student loans: Typically, federal student loans are discharged upon the death of the borrower. The executor of the person’s estate will need to provide a death certificate to the company that services the loan for this to happen.
- Private student loans: Conversely, private loans for education and other student expenses generally survive a person’s death. These types of loans are treated as unsecured personal loans and must be repaid via estate funds. It’s important for the executor to review the terms of the loan agreement to understand what needs to be repaid.
What Debts Are Forgiven at Death?
While most types of loans continue to be owed even after you die, a few, such as federal student loans, may be discharged when your heirs show the lender your death certificate. Credit card balances over and above the assets in a person’s estate are generally forgiven and not passed on to family members.
Navigating Estate Debt
Dealing with debt after a person passes can be overwhelming. It can be difficult to figure out what your family member owed and how to pay it. However, with careful planning and support, most families are able to navigate these financial challenges and honor their loved one’s legacy with grace and dignity.
Written by Molly Allen
Molly has been a full-time freelance writer since 2005. She has written thousands of well-optimized, well-researched web articles on topics ranging from travel to e-commerce. She has also written feature articles for popular web and print publications. Molly is the author of three, published non-fiction books and is currently under contract for a fourth book. She has a BSBA in marketing from Bowling Green State University (Ohio). Molly specializes in writing about travel, food/beverages and digital marketing.
Edited by Alyssa Hill
Alyssa Hill is an experienced editor and health writer. She holds an M.A. in journalism from the University of Arizona and is also a certified somatic practitioner. A former content manager for multiple start-ups in the marketing and health/medical industries, Alyssa has extensive experience writing medically accurate and well-researched content, editing articles for clarity and SEO, adhering to strict guidelines, and ensuring all content is up to standards.
Subject Matter Expert Kris Lamey
Kris Lamey is a seasoned writer and subject matter expert (SME) in finance, holding a degree in Journalism and an MBA. Alongside her roles in radio and journalism, Kris has enjoyed over 15 years of success in the FinTech industry. She's a Real Estate investor (former broker) who currently freelances as a writer, boasting over 15 years of experience, and she eagerly welcomes new clients and challenging topics. Kris is also actively involved in the health care industry, specializing in mental and behavioral health. She is well-versed in various content formats, including articles, blogs, website marketing copy and press releases.
Sources
Consumer Financial Protection Bureau. (n.d.). Does a person’s debt go away when they die? Sourced from https://www.consumerfinance.gov/ask-cfpb/does-a-persons-debt-go-away-when-they-die-en-1463/