What happens to debt when you die?

Depending on the type of debt it is, there’s a couple of different outcomes for you, your loved ones and how that debt can affect your future. Different types of debt can have a variety of effects on things like your taxes and your credit score, not to mention the effects they can have after you’re gone. It’s important to be aware of how each type of debt operates.

There’s a variety of debt-types out there, but we’ll focus on five: Credit card debt, Mortgages, Student loan debt, Medical and Auto loans.

Credit card

This debt is considered a revolving account, which means you don’t have to pay it off at the end of the loan term (i.e., usually at the end of the month). However, to stay in good standing, you’ll have to pay the monthly minimum balance. Be aware that only paying the minimum means your interest can creep up, increasing your debt.

What happens to credit debt when you die?

According to the Federal Trade Commission, family members of the deceased are not automatically obligated to use their own money to pay for credit card debt. The debt will be paid through the deceased’s estate, rather than, say, their kids.

There are some contexts where you may be liable to pay back the debt. For example, if you’re a co-signer on the credit card or if you have a joint credit card account, then you’d continue to pay back the debt. There’s also the possibility you’re a spouse in a community property state; if so, you’d also be liable to repay the debt.

Mortgages

This is the biggest type of consumer debt. The US mortgage debt shot up to $250 billion in the first few months of 2022. These are installment loans, which means you pay them back in a set number of payments over a period of time (usually 15 to 30 years). People tend to pay off their mortgage in monthly payments.

What happens to mortgage debt when you die?

If you’re a spouse on a mortgage, then you’ll simply continue to be liable for the debt. However, if you’re not a co-signer, there’s no obligation to pay. But, the mortgage still exists, so any surviving residents would more than likely have to take on the debt to continue living in the house.

Student loans

These loans are taken out by people to pursue an undergraduate or graduate education at a university or college. They’re unsecured debts, so they’re more flexible than other types. Student loan debt holders in the US owe a collective $1.76 trillion in federal and private loans as of December 2022.

What happens to student loan debt when you die?

If you have federal student loans, the debt will be discharged when you die. You’ll have to provide a proof of death in order for the discharge to occur.

For private student loans, though, if you have a co-signer, like a parent or a guardian, they’d assume responsibility for that debt. Some lenders have stipulations stating that the debt must be paid immediately if the original owner passes away.

Medical

Medical debts aren’t secured with property and typically don’t come with a payment period or structure. However, hospitals and medical facilities often have billing departments who’ll work with you for payment.

What happens to medical debt when you die?

Similar to credit card debt, medical debt may pass on to a surviving spouse if you live in a community property state or if you’re a co-signer. There’s also the fact that many states require children to provide financial support to parents who can’t afford their bills—these bills can include things like nursing homes.

Auto loans

These are like mortgages in that they’re a secured installment plan. You pay a set amount over a period of time. Should you stop making payments, the lender can repossess your car to get its money.

What happens to auto loans when you die?

There’s a couple of options: you can either let the car be repossessed or you can sell it to pay off the debt that is owed. Or, you can assume ownership of the debt and continue to pay off the loan. You may need to be qualified as a borrower or apply for a whole new loan, depending on the lender.

How life insurance can cover you for leftover debts

Now that we can answer “what happens to debt when you die?” we now have to think about the ways that we protect our loved ones. Debts can pile up and a lot of people will have more than one debt type they’re taking care of at any time. Here’s how you can be smarter in making sure those we leave behind aren’t negatively affected by our debts.

A term life policy is a great way to not only make sure your loved ones are protected, but to also give you peace of mind now. That way, even if you pass, you know that your debts may not get passed on to your spouse, parents, or even kids. But it’s important to get the right amount of coverage.

For example, a Wysh term life policy of $500,000 may sound like a lot right now. But if your family wants to use that for credit card debt, your mortgage and any medical costs, there might not be a lot left to provide for your kids’ future education or setting your spouse up with some much needed vacation time. Make sure you’re getting the right amount of coverage for your needs; not too much and definitely not too little. Get a policy that’s just right.

If you need help thinking about your needs, take a look at our free Wysh Builder tool. You can customize a policy that’s just right for you and your family’s needs. Plus, it’s a great way to visualize the things you most want to protect. Once you do that, you’re one step closer to getting the financial protection you’re looking for.

TL; DR

1. Various types of debt, like credit card, mortgage and student loans, may transfer to co-signers or surviving spouses in the event of the holder’s death—others may transfer to holder’s estate.
2. A community property state, spouses are considered joint owners of nearly all assets and debts acquired in marriage.
3. A term life insurance policy can help protect your loved ones financially from lenders seeking payment on leftover debts.

‍