The average American consumer now owes about 10% of their disposable income to non-mortgage debt such as car loans, credit cards, student loans, or personal loans. As a result, more people are wondering: What happens to my debt when I die?
The average US household credit card debt balance alone is around $8,500 in 2022. However, it's significantly higher in many cities. In NYC for example, the average is 1.8X higher at over $15,400. That's a lot of money given the average credit card interest rate is in the mid-teens. Not even the great Warren Buffett has been able to generate such high returns.
With increasing household debt and fears of death mounting with constant fear mongering news topics such as COVID-19 coronavirus, many people are trying to better manage their debt loads.
What happens to your debt when you die depends on several different things. The state you live in, what type(s) of debt you have, if anyone else is on the loan(s), and if the debt is secured or not can all determine what happens to your debt when you die.
What Happens To Debt After Death
Generally speaking, the government has laws in place designed to protect your relatives from debt collectors and creditors if you die with outstanding debt balances. Certain types of accounts such as 401(k) and IRA retirement accounts and life insurance death benefits usually can't be taken away to pay off your debt either.
- A key factor is what comprises your estate when you die. Creditors can technically make claims on the assets in your estate you've left behind to cover your debts.
- Things also get a little more complicated if you have co-owned assets and jointly owned accounts. Whomever is co-signed on your accounts that have debt balances when you die are typically responsible for paying off the remainder. Thus, always think carefully before asking a loved one to co-sign with you when you take on debt.
- Certain community property state laws can also impact the answer to happens to my debt when I die. If you incur debt while married in a community property state, your spouse will be held responsible for your debts when you die even if they didn't co-sign. Half of any community property from your marriage could also be put toward debt obligations. The nine community property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
What Happens To Different Types Of Debt When You Die
There are many different types of debt including mortgages, personal loans, credit card debt, student loans, car loans and more. If you're wondering what happens to my debt when I die, let's take a closer look at the most common types of debt to get some answers.
Be sure to read my debt optimization framework for financial independence as well.
Mortgage Debt After Death
The largest purchase most people make in their lives is their home. And most Americans are not paying all-cash for their primary residences, they have home mortgages that may take decades to pay off in full.
If there is an outstanding balance on your mortgage when you die, your heir(s) or co-owner (if you have one) will be responsible to paying off the remaining mortgage balance.
What typically happens is the executor of your estate can use cash or sell assets in your estate to pay off the mortgage if there is enough available. Another common option is to sell the property and use the proceeds to pay off the balance owed.
This is why you need to be careful taking out too much money out of your home. If you have more debt than equity, when it comes time to sell, your beneficiaries will owe.
At least take advantage of low mortgage rates by trying to refinance before you die. You can check the latest mortgage rates online in minutes using an mortgage marketplace where lenders compete for your business.
Credit Card Debt When You Die
As mentioned above, the average US household credit card debt balance alone over $8,500. And one in ten adults says they carry a credit card balance over $5,000 according to NBC.
So what happens to credit card debt when you die? If you do not have a joint account holder on your credit card, your family won't be responsible for any unpaid balances when you die. Authorized users aren't responsible, however.
Credit card debt is unsecured debt, meaning it isn't secured by assets like a mortgage. Thus, credit card companies can't access anything more than what's in your estate when trying to collect payments due.
If you want to start reducing your credit card debt now while you're still alive, consider doing a credit card balance transfer. Here's a list of the best 0% APR balance transfer credit cards.
Unpaid Medical Bills When You Die
As if our healthcare system wasn't complicated enough, unpaid medical bills can get very complicated. In most states, medical bills take priority during probate.
If you receive Medicaid any time from the age of 55 until you die, your state could come after those payments. They may also take a portion of the proceeds of your house sale if there's a lien in place on your home.
Some states also have filial responsibility laws, meaning your children could have to pay off your long-term care costs, hospital bills, and nursing home care debt. They aren't commonly enforced, but it's not worth the risk of putting your children's financial status in jeopardy if you're unprepared.
Due to the complexity of medical debt laws by state, it's a good idea to speak with an attorney if you anticipate having a lot of medical debts.
Car Loan Debt After Death
Car loans are a form of secured debt, meaning your assets can be used to cover balances owed. The lender also typically has the ability to repossess the car if there's not enough money in your estate. Alternatively, the heir who inherits your car could choose to continue making the payments or sell the vehicle to cover the loan.
Debt On Student Loans When You Die
What happens to student loan debt when you die depends on the type of student loans. Federal and Parent PLUS Loans are forgiven upon death.
Most private student loans, however, have to be paid out by your estate unless there are insufficient funds. Sallie Mae and Wells Fargo loans are an exception amongst private student loans and are forgiven at death.
Not All Debt Is Treated The Same Upon Death
What happens to my debt when I die? There isn't one simple answer. However, there are many cases where you loved ones are protected from debts you haven't paid. Here are some important things to remember.
- Not all debt is treated the same, so what happens to it when you die varies. Depending on the type of debt, any remaining balances may be forgiven outright when you die, may need to be paid out from your estate, or may only be forgiven if your estate doesn't have sufficient funds.
- Where you live also impacts what happens to your debt when you die. For example, if you live in a community property state, any debt incurred while you are married will be owed by your surviving spouse. Any debts prior to your marriage will not pass to your spouse.
- Some creditors have been known to contact surviving family members and make inaccurate claims about whom is responsible for unpaid debts. It is best for your loved ones to consult an estate attorney when you die for their protection.
- Purchase a life insurance policy and keep the list of beneficiaries updated. Life insurance can provide a lot of peace of mind for you and your family.
- Have the executor of your estate notify creditors of your death in a timely fashion to help prevent missed payments and fees.
- You'll also want to make sure your executor knows it's important to send the three major credit agencies a copy of your death certificate. This can prevent identity theft and protect your estate.
Creditors Have A Limit
In most situations, creditors can’t collect beyond what’s available in your estate when you die. When it comes to preparing for your inevitable passing, it's beneficial to be as ready as possible.
In addition to understanding the various answers to What happens to your debt when I die?, be sure to check out this preparing for death checklist.
Learn More About Life Insurance
Want to learn even more about life insurance? Here are some of my articles you should explore:
- Different Types of Life Insurance Explained
- What Is Whole Life Insurance?
- How To Get Life Insurance Without A Blood Test
For even more great resources, check out my Top Financial Products page. You’ll find lots of fantastic resources I’ve used that can help you increase your financial knowledge and grow your wealth.
Get Free Life Insurance Quotes
Thanks to technology, it’s easier than ever to compare term life insurance policies. The most efficient and free way to get competitive life insurance quotes is to check online with Policygenius. They are the #1 life insurance marketplace where qualified lenders compete for your business.
You can quickly search for policies across multiple carriers through Policygenius’s online portal for free. I’ve know the founders of Policygenius for years and they have truly build a fantastic resource for individuals.
About the Author: Sam started Financial Samurai in 2009 as a way to make sense of the financial crisis. He proceeded to spend the next 13 years after attending The College of William & Mary and UC Berkeley for b-school. He then worked at Goldman Sachs and Credit Suisse. Sam owns properties in San Francisco, Lake Tahoe, and Honolulu.
In 2012, Sam was able to retire at the age of 34. His investments generate six-figures a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies.