Two things no one ever wants to think about are death and debt. This may be the reason that not many people are aware of what happens to debt when you die. This blog will briefly examine some of the considerations family, heirs, cosigners and estate administrators have when someone dies with significant debt.
Creditors do not let a little thing like death get in the way of collecting payment. Credit cards, personal loans and other types of consumer debt do not go away upon death. Instead, the estate pays what debts it can to creditors. The estate is a legal entity of collected assets and debts of the deceased, managed by an estate administrator. As part of probate, the estate administrator will oversee the distribution of the estate according to state law and the estate plan, if any exists. If there are not enough estate assets to cover existing debts, the assets will be distributed to creditors according to a plan approved of by the court.
Federal student loans are discharged upon the death of the borrower, relatively good news for the tens of millions of Americans who have federal student loan debt. However, this is not true of all private student loans. If you have a cosigner (likely a parent) on a private student loan then that cosigner may be on the hook for repaying the debt.
(Tip: If you are in this situation, you may want to obtain a cosigner release from the lender. If that isn’t possible, the parent may wish to take out a life insurance policy on you to pay for the student loans, which may become due immediately upon your death).
In many cases, the home of the deceased is sold as part of the probate process. Ideally, the proceeds of the sale will cover the existing balance of the mortgage, with perhaps a little left over to distribute to other creditors or to beneficiaries named in the will. If not, mortgage debt is treated similarly to other kinds of debt.
If the person who died owned the home with someone else, however, the situation can be a little trickier. If you own a home as “tenants in common” then your share of the home becomes part of your estate. If you own it as “joint tenants” (which is likely for a married couple) then full ownership of the home passes automatically to the surviving spouse. This does not eliminate the mortgage, however, even if you are the sole borrower on the mortgage loan. The mortgage is also part of your estate.
Estate planning is not just about caring for loved ones by providing for them in a will. It is also about lessening the financial burden on loved ones and the estate administrator, who will have to arrange payments for the funeral and pay off debts of the estate.
If you have questions about your estate plan and your debt, reach out to an estate planning attorney to discuss your legal options.