After someone dies, most families do not immediately think about what happens to the debts of the deceased individual. Although an individual with an illness may have had time to plan their estate, those who pass suddenly and unexpectedly might not have a plan. No matter what the circumstances are, it is essential to understand what happens to a person’s debts when they pass to the afterlife.

Are the debts forgotten?

After a person’s death, the credit bureaus should be notified. Otherwise, any credit accounts of the deceased may continue to accrue interest. Most creditors require proof of death, such as a copy of the death certificate. In addition, persons continuing to use the deceased’s credit cards and neglecting to provide notification of death to the credit bureaus may be found guilty of fraud.

Regardless if the individual had an estate plan or final will and testament, creditors are usually paid by the estate. Often, the amount of debt may surpass the level of assets, resulting in a loss to lenders. If there are not sufficient resources in the estate to pay the debts, and another individual is not found responsible, the debts are written off. However, if the accounts have a surviving cosigner, that person assumes responsibility to repay the lender.

Differences among the types of debt

Depending upon the type of debt, others may or may not assume the burden of responsibility. For example:

• Mortgage/home equity loans – If a cosigner exists, they must make payments. Or, if someone inherits the home, that person may continue to make payments. If there is no heir, but enough funds in the estate, the executor may pay the lien.
• Car loans – These follow the same principles as mortgages.
• Credit cards – Joint account holders or spouses in community property states may be held liable. Authorized users are not responsible.
• Student loans – Private loans not paid by the estate are usually discharged unless a cosigner exists or surviving spouse lives in a community property state. Lenders that discharge loans after a student’s death include Federal loans, Sallie Mae, and Wells Fargo. Any Federal Plus loans obtained by parents of students are forgiven if the child or parent dies.

Are there exceptions?

Currently, there are nine states (along with Puerto Rico) that adhere to the ‘community property’ rule. This means that property obtained or debts incurred during the marriage are equally shared by the couple or jointly owned, even if only one spouse signed the credit agreement.

Ultimately, it is up to the courts to make the decision on whether or not the surviving spouse is held liable for the debts of the deceased.

Community property states:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Bringing It All Together

Death is an unfortunate event that even the healthiest, most cautious people cannot escape. Planning ahead ensures relatives and friends are not overwhelmed with unforeseen expenses after death. It may become useful to search for tips on managing a budget before and after death.

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