Loans and debts: what’s cancelled and what’s passed on after someone dies
Originally published at www.lantern.co
By: Danielle Selby
The average American household had about $137,900 worth of debt in 2019, according to personal finance company NerdWallet.
But not everyone is able to pay off their debts in full during their lifetimes — in fact, most people in the U.S. won’t. About 73% of American consumers will have some kind of outstanding debt when they die, according to an extensive study conducted by Credit.com.
The last thing anyone wants to think about after losing a loved one is bills and debts. So it’s important to know which debts and loans you may be responsible for, and which ones you don’t need to worry about.
We’ll start with the good news. All federal student loans are discharged — or canceled — if the borrower dies. This means that if you took out a federal student loan that you were not able to fully pay back during your life, the loan will not be passed on to anyone else. Similarly, if your parent took out a parent PLUS Loan to help pay for your education, that loan would be canceled if either you or your parent died. In the event that a loved one dies with outstanding student debt, the only responsibility a surviving family member would bear is to submit proof of death, such as a death certificate, to the student loan servicer so that the debt can be officially discharged.
Private lenders are not required to cancel student loans if the borrower dies, but some, like Sallie Mae, do. Each of these lenders may have different loan terms, so it’s best to check the terms of the agreement. Private lenders that do not discharge loans when a borrower dies will usually pass the debt onto the deceased’s estate. The debt would then be settled through the probate process and be paid out of the estate, which includes assets like money and valuable property. If the person’s estate does not have enough money to pay back the loan, the debt is not typically passed on to someone else. Instead, it is just left unpaid.
So when might you be responsible for the outstanding student loan of a deceased person? If they took out a co-signed private student loan. If the co-signer is living, they may be legally required to pay back the loan. Additionally, spouses may be responsible for paying back their partner’s private student loan if they live in a community property state — these include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin — according to the Consumer Financial Protection Bureau.
Credit Card Debt
Credit card debt is actually the most common type of debt people in the U.S. have at their time of death, according to Credit.com. Unfortunately, it is not usually forgiven when someone dies.
Different banks and credit card companies may have different terms, so it’s best to check with the card issuer, but most credit card debt will be collected from the deceased’s estate. Creditors only have a certain window of time to make a claim to collect the debt, and this window varies from state to state.
The executor of the deceased’s estate will be responsible for overseeing how these debts are paid off from the estate. If there isn’t enough money in the estate to pay off the debt, the debt will usually remain unpaid and no one else will be made responsible for the debt — but there are exceptions.
If you are a joint cardholder on the account of someone who has died, you may be responsible for paying off their debt. You may also be responsible for paying off the deceased’s credit card debt if you live in a community property, even if you are not a joint credit cardholder. An authorized user is not generally responsible for paying off the deceased’s credit card debt, unless the card corresponds to a joint account or they live in a community property state.
Much like credit card debt, an auto loan does not disappear when someone dies. The lender will generally collect on the loan from the deceased’s estate, and may even repossess the car if the estate cannot pay off the loan. However, the responsibility for the debt does not transfer to a spouse or family member, unless they co-signed the loan.
If your loved one had a mortgage on their home or other property when they died, that debt will only be passed on to someone if they are a joint homeowner, as is often the case with spouses, or to the person who inherits the property. The person who inherits the property will become responsible for continuing to pay off the mortgage; however, federal law prohibits lenders from demanding the payment immediately and all at once.
If neither of these cases applies, the mortgage would generally be paid off out of the deceased person’s estate.