Debt after Death: What Happens to Debt You Leave Behind?

Debt and death are two topics that can be hard to talk about. But it’s important to understand what happens to any debt that you may leave behind in the event of your death. Will your spouse need to pay down your credit card debt? What about any car payments you had? Learn how you can best prepare your finances so you can help make sure your loved ones have financial peace of mind.

Mortgages

If you’re still paying off your mortgage, don’t worry – you’re not alone! A recent survey found that 63% of Americans have a mortgage.¹ But, there are a few scenarios to consider when it comes to leaving your mortgage behind.

Joint Mortgages and Cosigners

If you have a joint mortgage with your spouse, they’ll have to continue payments on the loan. Similarly, if you had a cosigner on the home loan, they’ll be responsible for paying it off in the event of your death. This stands true even if the cosigner doesn’t live in your home.

Passing your home to heirs or relatives

Are you leaving your home to family? In most cases, federal law requires lenders to allow your family or other heirs to take over your mortgage as it is when they inherit your home. This way, your heirs can avoid the due-on-sale or acceleration clause that typically allows a lender to demand immediate and full payment upon transfer or sale of a home. Your heirs can also use any funds from your estate to pay off the mortgage entirely. This includes mortgage protection in the form of life insurance you may have purchased. Or, your heirs can re-finance the mortgage at a lower interest rate or reduced monthly payment.

Selling Your Home

So, what happens if your estate doesn’t cover your remaining mortgage balance? Or if your heirs are unable to make the monthly mortgage payments? They may consider selling your home. However, there are a few considerations to keep in mind before making this decision:²

• If your home is worth more than what you still owe on it. The profits from selling the home can be used to pay off other debts, or can be distributed to your heirs. If an individual heir takes over your mortgage and ownership of the home, they can take the profits from its sale and use as they please.
• If your home is worth less than what you owe on it. This is a little bit trickier. Your heirs may be able to negotiate a short sale with your lender. This means that the lender may allow your heirs to sell the house back at a lower balance than what your remaining mortgage balance is. Your lender can also foreclose your home, however that’s best kept as a last resort.
• If your home is seized to pay off other debts. Regardless of if you have a mortgage or not, if your home is the only significant asset you leave behind, your creditors may seize it. This varies state by state, but your home may be used to pay off significant unpaid bills and debt that you leave behind. If you’re unsure if this applies to you, check with an estate attorney to see what the laws are in your state.

Credit Cards

In most cases, funds from your estate will be used to pay off your credit card debt. If your estate doesn’t cover your credit cards, then your credit card company may be out of luck. Unlike mortgage and car payments, credit card debt isn’t backed by assets. However, there are two scenarios where your credit card debt may be passed on:

• You have a joint bank account with someone. If this is the account that you have credit card debt in, the joint account holder will be responsible for paying it off. You may also want to learn about what happens to your bank accounts after the death of your spouse.
• You live in a community property state and are married when you pass away. In these states – which are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – your spouse will be responsible for paying off any debts that were acquired while you were married. This includes credit card debt.

Car Payments

Like most debt, your estate can be used to pay off car loans. However, if you have a cosigner on the car loan, they’ll be responsible for paying it off if your estate doesn’t cover the balance owed. If your car is inherited, the heir can continue making payments toward the loan, and your lender is unlikely to take any further action. If your estate doesn’t cover the amount owed, or your heirs or cosigners can’t make the car payments, the lender can repossess your car.

Student Loans

Whether or not your student loans are passed on depends on the type of loan you have, if you have a cosigner, and if you live in a community property state.³

Types of Student Loans

Depending on the type of student loan you have, it may be discharged, meaning no one will be responsible for paying the remaining balance.

• Federal student loans: If you have a federal student loan, the remaining balance is discharged in the event of your death. If you have a cosigner, they won’t be held responsible for paying the remaining balance as long as they present a certified death certificate to the loan provider.
• Parent PLUS Loans: Since these are also federal loans, the same rules apply, and the remaining balance of the loan will be discharged.
• Private Student Loans: Private student loans are similar to personal loans. Because of this, some private lenders offer a death discharge while others do not. This means that your loan provider may require funds from your estate to pay off the remaining balance. If you have a cosigner, they’ll most likely be responsible for paying off your private student loan in the event of your death. Contact your private student loan provider for further clarification about their death discharge policies.

Student Loans in a Community Property State

If you live in a community property state, your spouse may be responsible for paying off your student loan in the event of your death. This typically only happens if you took out the loan while you were married to your spouse. As a reminder, the community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

How to Prepare Your Debt

So how can you best prepare your debt you may leave behind so your loved ones can have financial peace of mind? Ideally, you’ll have outlined the details of your estate in your will and noted how your possessions should be distributed to your heirs. There are also tools you can use to help offset the financial weight that a mortgage, car payment or student loan may have on your inheritors. You may consider taking out a life insurance policy, or simply making a strict budget to adhere to that will help you pay down your debt while being able to leave a financial legacy.

Mutual of Omaha and its representatives do not provide tax and legal advice, and the information provided herein is general in nature and should not be considered tax and legal advice.

SOURCES:

¹ Magnify Money (December 21, 2018). Web page: U.S. Mortgage Market Statistics: 2018. Retrieved on January 23, 2019, from https://www.magnifymoney.com/blog/mortgage/u-s-mortgage-market-statistics-2018/

² Interest.com (December 17, 2018). Web page: Dying with a mortgage: What happens to your home? Retrieved January 23, 2019, from http://www.interest.com/home-equity/news/dying-with-a-mortgage-what-happens-to-your-home/

³ Student Loan Hero (December 18, 2017). Web page: What Happens to Student Loans When You Die? Retrieved on January 23, 2019, from https://studentloanhero.com/featured/what-happens-to-student-loans-when-you-die/

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