What Happens to Your Debt When You Die?
- February 14, 2018
- Posted by: Jeff Gitlen
- Category: Personal Finance
According to a 2016 report, 73 percent of people had outstanding debt at the time of their death. The average amount of outstanding debt at the time of death was $61,554 including mortgage debt and $12,875 excluding mortgage debt. The most common type of debt was credit card debt.
About 68 percent of people had credit card balances, and the average unpaid balance was $4,531. Around 36 percent of people died with mortgage debt. 25 percent of people died with an unpaid auto loan balance of around $17,111. Personal loan debt totaled $14,793, and 12 percent of people had outstanding personal loans. Only 6 percent of people still had outstanding student loan debt at the time of death, but those balances averaged $25,391.
With all of this debt outstanding at the time of death, it’s important to consider what happens to debt when you die. Does the debt die with them or just get transferred to someone else?
Responsibilities by Type of Debt
The laws are different in each state, and there may be unique circumstances in different situations. These, however, are the general rules of debt responsibility after the death of the borrower.
If the borrower owns the home with another person, the outstanding debt becomes the sole responsibility of the co-owner. Under federal law, however, a lender cannot require immediate payment of the outstanding mortgage debt if there is a co-owner of the property.
If another person inherits the mortgaged property, that person inherits both the property and the outstanding mortgage debt. The outstanding debt may be paid by the estate of the deceased, or the person who inherits the property can simply make the mortgage payments.
Home Equity Loan
The rules governing payment on a home equity loan are similar to the rules regarding mortgage debt. If the deceased owned the property with another person, the home equity debt becomes the sole responsibility of that co-owner. If someone inherits the property, the lender generally requests full payment on the outstanding home equity loan debt. The lender may be willing to allow the new owner to simply take over the existing home equity loan payments.
Federal student loans are one of the few forms of debt that die along with the borrower. If there was a cosigner, however, that person may inherit the outstanding balance of the student loan. In general, private student loans are not discharged with the death of the borrower. The estate of the deceased would be required to pay the outstanding loan balance. Some private student loan lenders, such as Sallie Mae and Wells Fargo, started forgiving student loan debt upon the death of the borrower.
The debt associated with a car loan is not forgiven upon the death of the borrower. As long as the estate or the person who inherits the car continues to make payments on the car loan, the lender will not repossess the car. If, however, the lender does not receive payment on the loan, they will attempt to seize the car to fulfill the debt obligation.
The estate of the deceased is responsible for paying off any credit card debt. If the estate runs out of money before paying all the debts, however, the bank writes off any remaining credit card debt. Since credit card debt is unsecured debt, the bank cannot seize an asset in order to fulfill the debt obligation.
In community property states, however, the remaining spouse is responsible for any of the debt incurred during the marriage. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
If a family member dies with a lot of debt, it can be a real burden for the family. Ideally, it is a good practice to straighten out your finances before you die in order to save your family from the trouble of sorting out your debt after your death. People who don’t know that their debt does not die with them might make the mistake of taking out a lot of debt and making large purchases prior to their death. Unfortunately, the debt usually lives on and gets passed down to the heirs.