What Happens to Your Debts When You Die
So you died. Congratulations, you are finally debt free! Unfortunately, things are a little more complicated with your relatives. When someone dies, their debts don’t just disappear. Instead, for the most part, they become part of the deceased person’s estate—the totality of all remaining assets and liabilities. Understanding how these debts are handled is critical to both estate planning and managing inherited responsibilities. Let’s take a look at what exactly happens when you die with debts to your name, and what you can do to ensure your family members aren’t left with an unwanted surprise. And of course, none of this is legal advice – it’s just an overview of what, generally speaking, happens to your debts when you die.
First, the probate procedure
After death, the inheritance passes to the will. The legal process in which an executor is appointed to manage an estate, assets are identified and valued, actual debts are paid, and any remaining assets are distributed to heirs. During probate proceedings, any outstanding debts must be paid from the property and funds from the estate. The heirs do not receive the inheritance until the debts are repaid.
Most states require debt payments in the following order:
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Funeral expenses
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Property management costs
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Federal taxes
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Medical bills from last illness
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Secured debts
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Unsecured debts
If there are insufficient funds in the inheritance to pay off all debts (the so-called insolvent inheritance), the debts are paid in a regular manner. Lower priority creditors may receive partial or no payment, and remaining debts usually die with the deceased.
Some assets bypass probate and are protected from creditors. These include life insurance proceeds, retirement accounts with named beneficiaries, assets in living trusts, and property held in joint tenancy.
Types of debts and what happens to them
Now that we know the order of debts that need to be paid off, let’s look at how different types of debts are handled.
Federal Student Loans
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Automatically discharges upon death
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The death certificate must be provided to the credit institution.
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Private student loans may have different rules; some require payment from the inheritance
Credit card debt
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Paid from real estate
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Not inherited by family members unless they are co-signers on the account, joint account holders, or required by state law (in community property states – more on that below)
Medical bills
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Property is responsible for payment
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Family members are generally not liable unless they have signed financial responsibility forms or live in states with specific filial responsibility laws.
Mortgages and home loans
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Property may pass to heirs, but the mortgage remains
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Options for family members to inherit are to take over the mortgage and continue making payments, refinance the loan, or sell the property to pay off the debt.
Car loans
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As with a mortgage, the lender may allow qualified heirs to take out the loan.
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The car can be sold to pay off the debt.
Impact on family members
The good news is that relatives are usually not responsible for paying off the deceased’s debt unless:
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They are co-signers on a loan with outstanding debt.
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They are joint owners of the credit card account. (Note: this is different from Authorized User .)
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They are the surviving spouse, and your state law requires spouses to pay off a certain type of debt.
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They are the executor or administrator of the deceased person’s estate, and your state law requires the executors or administrators to pay the outstanding bill from the property that was jointly owned by the surviving and deceased spouses.
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They are the surviving spouse and you live in a community property state that requires surviving spouses to use community property to pay off the deceased spouse’s debts. These states include Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Unless there was a guarantor, joint account holder, or other exception, the debt is subject only to the estate of the deceased person.
Preventive measures
While you can’t plan for an unexpected death, there are steps you can take now to protect your heirs from debt complications. The most obvious step is to ensure adequate life insurance. Even if you are young and healthy now, you may still need a plan. Make life easier for your loved ones by maintaining detailed financial records and regularly updating beneficiary designations. Finally, consider creating a living trust and consult with an estate planning professional.
If you are a family member of someone who recently left behind debts, consider consulting with an estate attorney. Do not automatically pay debts out of personal funds and always request confirmation of the debt in writing, while maintaining detailed records of all communications.
Debt settlement is hard enough while you’re alive. Understanding what will happen to your debts when you die is the best way to avoid leaving a mess of your estate after you pass. What’s more, here’s how to talk to your kids about your estate plan now .