Student loans from the federal government are one of the only debts that can be forgiven at death. Although some private lenders that offer student loans also offer loan forgiveness.
In June 2023, the average federal student loan debt in the U.S. was about $37,650.1 A high student loan amount may worry you, but in most cases, you don’t need to be overly concerned about your loved ones being saddled with student loan debt or other installment loans left behind.
Keep reading to learn what happens to different kinds of debt after the primary borrower passes away.
What Happens to Finances After Death?
After an individual passes away, everything they owned of monetary value is passed onto their estate. The deceased person’s estate includes:
- The collective property
- Life insurance benefits
- Money owned by them in life
A will allows you to dictate what happens to your estate after death. But according to Planned Giving, about 68% of Americans lack a valid will!2 All assets not stipulated in the will of the deceased person will become the estate’s assets. Each state’s laws differ, so it’s important to become familiar with both federal and state laws on estates.
An Estate and Its Assets
Just as your assets pass to your estate, most of your debts will also be passed onto your estate. Your debts will not automatically be put on the shoulders of your family unless they were joint account owners or co-signers.
The process of dividing up a deceased person’s debt is called probate. The probate process can be quite complex depending on what financial planning was done before death and how much outstanding debt has been left behind. Probate will deal with all creditors that come forward, from mortgages, credit card debt, bad credit loans, and more.
During the probate process, creditors have a specific number of months to make a claim against your estate. When this happens, the beneficiaries of your estate handle the unpaid debts using the assets passed down to the estate.
Community Property State
Community property states have laws that dictate that any communal property shared by the deceased individual and their surviving spouse must be sold off to pay debts. In this case, the living spouse could be responsible for handling debts in a community property state if they wish to keep the communal property.
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, South Dakota, Tennessee, Texas, Washington, and Wisconsin. There are elective provisions for communal property in Alaska and Oklahoma.
What Debts Have the Possibility of Being Forgiven?
While a majority of debts are not forgiven after death, there are a couple of notable exceptions.
|Type of Debt
|Forgiven Upon Death?
|Federal Student Loans
|Typically forgiven. A family member must submit a death certificate to discharge the debt.
|Private Student Loans
|Forgiveness depends on the lender’s policy. Some may forgive, while others claim against the estate.
|The estate is responsible. If insufficient, co-signers or inheritors of the property may be liable.
|The estate pays the debt. If not possible, the vehicle may be repossessed or sold to cover the loan.
|Credit Card Debt
|Responsibility falls to the estate. Joint account holders may be liable, but not authorized users.
|Handled by the estate. Joint borrowers or co-signers might be responsible if the estate can’t pay.
|Paid by the estate. In some cases, small medical debts might be written off if the estate lacks funds.
|The estate is responsible for paying any owed taxes.
|The estate should settle any outstanding bills.
Student loans are one of the few types of debt that are often forgiven at death. Not all student loan debt is forgiven, as there are some private student loan companies that will make claims against an estate instead of forgiving student loans.
- Federal Student Loans — All federal loans are typically forgiven upon the borrower’s death. A family member will apply for discharge which will apply to all direct federal loans. A PLUS federal student loan taken out by the parent can be forgiven in the event of the death of the student or the parent.
- Private Student Loans — Private student loans are not as consistently forgiven as federal loans. Some private student loan companies like Sallie Mae, Wells Fargo, and RISLA often consider loan forgiveness in the event of a student’s death. However, other private lenders do not offer student loan forgiveness.
What Debts Can Be Inherited?
Most debts that are not forgiven at death will be handled by the estate through probate, with a few exceptions. All of this is mainly dependent on what safety nets were put into place by the deceased individual. Did they have a life insurance policy? Did they have retirement accounts or enough assets to cover debts?
Here is a brief overview of how different types of debt are handled in probate:
Joint Account Holders
If you have any loans or credit card debt with a joint owner, co-signer or co-borrower, they will be held responsible for the debt after your debt. Personal installment loans and credit card debt with a joint account holder will not become the estate’s debt. The joint account holder or co-signer will take on the remainder of the balance.
Credit Card Debt
Since credit card debt is a form of unsecured debt, the card owner is typically the only one who can be held responsible for the remaining balance. The credit card company will need to make a claim on the deceased individual’s estate. But if there is not enough money in the estate to pay off the credit card debt remaining, then all credit card companies who made a claim will have to write off the balances.
While the joint owners of a credit card will be responsible for the debt owed, an authorized user on a credit card has no ownership over the account. An authorized user will not be required to pay off the debt after the credit card owner has passed.
Car Loan Debt
Auto loans are secured debt, meaning that if the car payments are not made, the loan servicer could repossess the vehicle. The remaining debt on a car loan is paid out of the estate if the heirs so choose.
Those in control of the estate can choose to take on the car loan themselves to keep the vehicle, sell the vehicle to pay the balance, or let the lender repossess the vehicle if they don’t wish to keep it.
Mortgages, like car loans, are secured loans set up against collateral. The collateral on a mortgage loan is the home you purchased with it. The estate will be used to pay creditors the remaining balance on the house, so it is not foreclosed on.
If you left the house to someone else and your estate cannot pay off the mortgage loan debt, the new owner will be responsible for the mortgage payments after your death.
Medical bills tend to be the first debt handled by the estate in the probate process. Medical debt is paid out of the estate. Some of the smaller medical bills may just be closed out and declared uncollectible.
If you received Medicaid benefits after turning 55, it’s possible that your state may make a claim on your estate to get back some payments you received. If there is not enough money in the estate to handle all the medical debt remaining, the remaining balances may need to be written off.
Preparing Your Finances
There are plenty of ways to better prepare your finances to make your passing as smooth as it can be for your loved ones. Even though our own death is not something we want to spend much time thinking about, making proper preparations could give you peace of mind that the people you love the most will be taken care of and not have any added stress while grieving their loss.
Here are a few ways to prepare your finances to make things easier after your passing:
Life Insurance Policies
Everyone with a spouse and children, whether young or old, or any other loved ones who depend on them financially should have a life insurance policy.
Life insurance policies provide a death benefit to the policy holder’s beneficiary after they pass. This death benefit is money that can help the life insurance beneficiaries handle funeral expenses, long-term financial needs, and debts left behind.
A large life insurance payout can make all the difference when debt collectors come knocking on the doors of your family. If you have not purchased a life insurance policy yet, doing so as soon as possible is one of the best things you can do to ensure that your family members have what they need.
Work With a Certified Financial Planner
Don’t be afraid to get the financial support you need from professionals. You can’t expect yourself to know everything there is to know about estate and financial planning. Admitting you need help will empower you to make all the right moves with an experienced estate planning attorney by your side.
Have a Frank Discussion With Your Family
It is essential to discuss all possible eventualities with your family members, even if the discussion is difficult or uncomfortable. Discuss how the estate will pay outstanding debts that may exist after your passing. Show your family the insurance policy you have and what they can expect to receive. Clear communication about the possibilities that exist in the far-off or near future can relieve anxieties about what might happen after you pass.
Frequently Asked Questions About Debts After Death
The legal process for debt forgiveness after death varies depending on the type of debt and state laws. Generally, the estate executor is responsible for identifying debts and notifying creditors. The probate process then determines how debts are settled. For specific legal processes, especially for complex debts like mortgage or personal installment loans, it’s advisable to consult with an estate attorney.
Community property laws, applicable in some states, dictate that debts incurred during marriage are the responsibility of both spouses. Upon death, the surviving spouse may be liable for these debts. The specifics can vary greatly between states, so consulting a legal expert in your state is crucial for accurate guidance.
While there’s no universal list, common debts forgiven at death include federal student loans and sometimes private loans, depending on the lender. Other debts, like mortgages, personal installment loans, and credit card debts, are typically not forgiven and must be settled by the estate. For a comprehensive list specific to your situation, consulting a financial advisor or estate attorney is recommended.
Specific resources for different types of debts can be found through financial institutions, legal advisors, and government websites like the Consumer Financial Protection Bureau. For personal installment loans, contact the lender directly. For mortgage debt, consult with the mortgage provider or a financial advisor.
Case studies or real-life examples can often be found in financial advisory publications, legal casebooks, or through estate planning seminars. These resources can provide practical insights into how different debts are handled after death.
You can find contact information for debt advisors or legal counsel through local bar associations, financial planning organizations, or online legal directories. Websites like the American Bar Association or the National Association of Personal Financial Advisors can be good starting points.
Some financial websites offer interactive tools or calculators to help understand the impact of debt after death. These can provide an estimate of how debts like personal installment loans or mortgage loans might affect an estate’s value.
Online forums or community discussions on managing debt after death can be found on financial advice websites, social media groups, or forums like Reddit. These platforms can offer shared experiences and advice from individuals who have navigated similar situations.
For the latest legal changes affecting debt forgiveness, it’s best to consult recent legal publications, state government websites, or a legal professional. Laws regarding debts, including personal loans and mortgage loans, can change, and staying updated is important.
Non-traditional family structures, such as unmarried partners or blended families, may face unique challenges in debt management after death. For tailored guidance, it’s advisable to consult with legal professionals who specialize in estate planning and understand the nuances of property laws and other relevant legislation.
The Bottom Line on Debt Forgiven at Death From CreditNinja
Dealing with debt after the death of a loved one can be a complex and emotionally taxing process. But staying informed and seeking professional guidance can help ensure that debts are handled appropriately and legally after a person’s death.
At CreditNinja, we understand that consumers have questions on various financial matters. That’s why we offer an online blog with articles on almost every finance topic. Check out the CreditNinja Dojo for information on how to qualify for a personal loan, how to borrow money from a cash app, and much more!
- Average Student Loan Debt: 2023 Statistics | Best Colleges
- Wills & Estate Planning | Planned Giving
- What Debts are Forgiven at Death? | Policy Advice
- Debt After Death: What You Should Know | Kiplinger
- What Happens to my Debt When I Die? Is it Forgiven or Transferable? | Value Penguin
- 5 Reasons Why Life Insurance Is Important | Western Southern