What Really Happens To Your Debt After You Die

Depending on your level of debt, it can be easy to feel like you'll only ever escape it after you die. While this sentiment is definitely bleak, you're not alone in feeling that way. The total United States household debt level reached $17.06 trillion in the second quarter of 2023, according to figures from the "Quarterly Report on Household Debt and Credit" (via the Federal Reserve Bank of New York). Per that same report, credit card debt, in particular, has skyrocketed in the U.S. (in the face of higher housing costs and overall inflation), reaching a record high of $1.03 trillion. While these mounting numbers might have you thinking that dying will be the only way to clear them, the truth is more complicated. Depending on your specific debt and even what state you're in, your debt could end up costing your relatives long after you're gone.

The worst thing about debt repayment after your death is the sheer amount of items that can qualify for lenders to take. Homes, cars, jewelry, and furniture are all available to lenders in order to pay off your debt after death. This can have a significant impact on your spouse, children, and/or any relatives that could want or need those items. It's important to research the specific terms attached to each of your different debts in order to best prepare your family in the event of your death. While it's obviously not the most fun conversation to have, doing this research, talking to an estate lawyer, and learning about different liabilities depending on individual debt types can save your family the added burden of handling your debts after you're gone.

According to the Federal Reserve's Consumer Credit report, approximately 43.5 million Americans were facing $1.7 trillion in student loan debt to begin 2023. That number constituted 13% of the U.S. population, and the average amount owed per student was $37,787. Further, per Federal Student Aid, 92% of that $1.7 trillion was in the form of federal student loans. In October 2023, President Biden's administration announced that, through its loan forgiveness programs, it had canceled $127 billion of student debt for 3.6 million Americans.

Given how widespread student loan debt is, you might be surprised to learn that death is not a guarantee of debt forgiveness. This said, perhaps one of the only semi-positive things about federal student loans is that they're generally forgiven upon the borrower's death. Private loans, however, can be far more varied, so it's best to look at your loan terms to see what "death discharge" terms are included in your agreement. If your loan doesn't offer a death discharge, this means your lender can pursue your estate to collect the debt after your death.

Since student loans are considered unsecured debt (meaning the loan isn't backed or tied to any specific collateral), there are several ways for a lender to get its money back. This can be even more complicated if you and your spouse live in a community-property state (like Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin), which essentially allows lenders to go after your surviving family's home and assets to pay off your debts. This means your spouse and/or kids could end up paying for your student loans even after you're gone.

Just like with student loan debt, credit card debt is unsecured debt. This means that after you die, the responsibility for paying off the debt falls to your estate. Barring any property or assets, your credit card company could end up losing that money altogether. However, if your estate has any assets at all (and this can and does include any joint accounts) they become up for grabs with lenders.

This also means the executor of your estate is the one ultimately left with the responsibility of deciding what in your estate to sell in order to pay off your debts. Certain state laws actually require executors or administrators to pay your outstanding debt with property that was jointly owned by you and your surviving spouse, so knowing the specific estate and executor requirements in your state can be extremely important when estate planning.

It's also important to remember that if your spouse or partner is listed as a joint account holder on your credit card, the responsibility of the account's debt will ultimately fall to them to repay. With that being said, remember that joint account holders aren't the same thing as authorized users. This means that you don't have to worry about your children being held responsible for your debts if they're only listed as authorized users on your account.

Mortgages and home loans are considered secured debt since they're tied to a specific piece of collateral — in this case a physical property. This means that failure to pay off your mortgage can lead your lender to sell the property in order to recoup its lost/owed money.

It's important to know that secured debt lenders have priority over unsecured debt lenders in cases of bankruptcy and death. This means that if your estate doesn't have enough money to pay off this kind of debt, your secured lenders are able to go after other assets. This also means that, because they have higher priority, they're more likely to get their outstanding debt repaid than an unsecured debt lender.

Mortgages can get even trickier depending on the house's ownership. For instance, if the house has a joint owner, but that joint owner isn't a co-signer on the mortgage, they will still need to either sell the home to pay off the mortgage balance or take over and continue the mortgage payments. Failure to do either would result in foreclosure.

Also, if you elect to leave your home to someone else in the event of your death, the person who receives the home could also end up being stuck with the bill. If your estate ultimately can't cover the remaining balance on your mortgage, the person inheriting the house would ultimately be responsible for future payments. Depending on their financials, the home could end up being sold anyway.

Auto loans are also secured loans since they're tied directly to a vehicle. While auto loan debt isn't forgiven in the case of someone's death, it also doesn't automatically lead to an estate claim like some other debt types. If the person who died was still making payments on a vehicle, unless someone in the family decides to pay it off or continue making those payments, the car will be repossessed. This can end up being an easier solution for some families who might not want or need the specific vehicle in question.

With that in mind, most auto loans include death clauses in the agreements. These clauses can cover repayment, responsibility, and even loan terms if the borrower dies. Obviously, a loan co-signer would be on the hook for the remaining balance in the event of the primary borrower's death, but if there is no co-signer, the decision goes to the estate.

Depending on the specific terms of the borrower's auto loan, the vehicle in question might have to be refinanced. Since some lenders make refinancing a requirement of their death clauses, it's important to look at the specific terms of your loan. It's also important to understand how these lender terms can relate to or be dictated by your state's specific laws. This goes back to community property states in which the surviving spouse could be on the hook for the remaining loan amount even if they were not a co-signer or joint owner of the vehicle.

Medical debt typically has first priority when it comes to debt your estate must pay off. Even though each state has its own specific rules for how medical debt is handled after death, the high priority given to medical debt is fairly consistent. The state itself can actually make a claim on your estate (more than likely on your house) in order to recoup any Medicaid payments you might have received. Given the high price tag associated with most medical debt, chances are an estate would not cover it all. While some medical debt is forgiven in these cases, there are also some important exceptions that could leave family members with your medical debt burden.

While co-signers and spouses in community property states could be left on the hook, filial responsibility laws can also include relatives. Some states still have laws that hold adult children financially responsible for their parents' unpaid medical debt (even if they didn't share or co-sign on the debt in question). Depending on the state, these statutes and laws can basically mandate that children must financially support their parents if they're unable to support themselves. Some states even extend this to other relatives, meaning any adult in a family could be responsible for care and, ultimately, debts. Thirty states in the U.S. have some kind of filial responsibility laws on the books but the terms and even enforcement of these varies widely. For instance, 11 states never enforce their laws while Pennsylvania aggressively enforces them.