Have you ever asked yourself, “What happens to debt when I die?” You might be surprised to find that the answer is not very straightforward.
Factors such as the type of debt you have, if your debt has co-signers, and even the state you live in can change the answer to this question.
Read on to learn the details so you can make sure the outcome is one you feel comfortable with, whether you’re looking at what happens to your student loans or other types of debt when you die.
What happens to debt when I die?
The answer to this questions depends, in part, on what type of debt you have. Dr. Sean Stein Smith, assistant professor at Lehman College and member of the AICPA Financial Literacy Commission, offers a list to help:
- Credit cards are not usually passed on to family members after death. However, co-signers could be responsible for repayment. Authorized users are rarely liable for any credit card debt of the decedent.
- Personal loans are similar to credit cards. Most are unsecured debt with no collateral, and unless someone cosigned, family members aren’t responsible for repayment.
- Mortgages, if they go unpaid, will eventually be foreclosed on by the bank. If, however, you take over the payments on the mortgage promptly, then you can prevent this from happening.
- Auto loans work the same as mortgages. If you take over the car payments quickly, then the car shouldn’t be repossessed, regardless of whether or not you initially purchased the vehicle.
- Federal student loans are discharged if the borrower dies and will not be passed on to anyone else. As for private loans, it depends on whether or not they had a co-signer, as well as what the lender spells out in its terms and conditions.
According to Smith, your heirs won’t be responsible for your debt if your estate is solvent, which means there’s enough in it to cover the cost of all the debt. But if the estate is insolvent, then the responsibility will vary based on where you live, your relationship to your heirs, and their relationship to your debt.
Who’s responsible for your debt
- They co-signed on your debt
- If you live in any of the nine states with community property law (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin)
- You have a spouse and live in a state that requires them to repay certain types of debt, such as medical debt
- The person responsible for resolving your estate didn’t do so per your state’s probate laws
Your estate is responsible for your debt
Ultimately, your estate is responsible for your debt, explains estate and tax attorney Mitchell R. Miller. Secured debt is the priority, followed by unsecured debt such as credit cards and student loans.
So, who handles all of this? Mitchell says someone appointed as your estate’s executor, administrator, or trustee must notify your creditors and publish a legal notice of your death. From there, the creditors make their claims against your estate.
When your loved ones could hear from debt collectors
Although creditors must direct their collections efforts to your estate and not your family, that doesn’t mean your loved ones won’t hear from them. According to Mitchell, if your heirs receive funds or property from your estate before paying a creditor, the creditor can sue them.
What’s more, you might still hear from the creditors even if you don’t owe, says Leslie H. Tayne, financial attorney at Tayne Law Group and author of “Life & Debt.”
“Creditors will often try to guilt family members into paying, but there is no legal obligation to pay as long as the debt was solely in the decedent’s name.”
Your co-signers — and others — could be on the hook for your debt
If you die while you are in debt, your co-signer or guarantor is responsible for the debt. This is just another reason why co-signing on debt is such a huge responsibility.
Bankruptcy, tax, and estate planning attorney Randall R. Saxton talks more about this:
“If you have debt or assets that have a co-owner or co-signer, such as mortgage, home equity loans, joint credit cards, car loans, or student loans, the debt will pass to that co-owner or co-signer.”
The next person most likely to be held liable for debt is your spouse, unless you took on the debt before getting married. If you live in a community property state, your spouse could be liable anyway. And anyone inheriting assets with debt tied to it (such as a mortgage) will also inherit the debt.
How to prepare for the worst
If you’re worried about this, here’s what you can do to prepare and protect your loved ones.
The first step is to release co-signers from your debt. For example, private student loans offer co-signer release after you’ve made a set amount of consecutive, on-time, in-full payments (the number of payments required depends on the lender).
If you apply for co-signer release once your income, credit score, and payment history allow it, you can be sure others aren’t liable for your debt.
Also, if you have collateralized assets such as a home or car, make sure the person you’d leave the assets to wants them. If they do, prepare them with the knowledge of the debt on those assets. That way they won’t be blindsided by an inheritance tied to debt.
Finally, prepare a will. That way you can line up where you want your assets to go and who should manage the estate, while also informing them of that status ahead of time.
Handle this now so you can get on with your life
We made it through the death and debt discussion, although with some homework for you: Do what you can to put things in order now so you don’t have to dwell on this topic.
Once you do, then you can get back to living your life and enjoying your money. And you won’t have to worry about unnecessarily burdening your family should something happen to you unexpectedly.
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1 Important Disclosures for Splash Financial.
Splash Financial Disclosures
Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval. To qualify, a borrower must be a U.S. citizen or permanent resident in an eligible state and meet applicable underwriting requirements. Not all borrowers receive the lowest rate. Lowest rates are reserved for the highest qualified borrowers. If approved, your actual rate will be within a range of rates and will depend on a variety of factors, including term of loan, a responsible financial history, income and other factors. Refinancing or consolidating private and federal student loans may not be the right decision for everyone. Federal loans carry special benefits not available for loans made through Splash Financial, for example, public service loan forgiveness and economic hardship programs, fee waivers and rebates on the principal, which may not be accessible to you after you refinance. The rates displayed may include a 0.25% autopay discount.
The information you provide to us is an inquiry to determine whether we or our lenders can make a loan offer that meets your needs. If we or any of our lending partners has an available loan offer for you, you will be invited to submit a loan application to the lender for its review. We do not guarantee that you will receive any loan offers or that your loan application will be approved. Offers are subject to credit approval and are available only to U.S. citizens or permanent residents who meet applicable underwriting requirements. Not all borrowers will receive the lowest rates, which are available to the most qualified borrowers. Participating lenders, rates and terms are subject to change at any time without notice.
To check the rates and terms you qualify for, Splash Financial conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Splash Financial and our lending partners reserve the right to modify or discontinue products and benefits at any time without notice. To qualify, a borrower must be a U.S. citizen and meet our lending partner’s underwriting requirements. Lowest rates are reserved for the highest qualified borrowers. This information is current as of October 1, 2020.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
All credit products are subject to credit approval.
Laurel Road began originating student loans in 2013 and has since helped thousands of professionals with undergraduate and postgraduate degrees consolidate and refinance more than $4 billion in federal and private school loans. Laurel Road also offers a suite of online graduate school loan products and personal loans that help simplify lending through customized technology and personalized service. In April 2019, Laurel Road was acquired by KeyBank, one of the nation’s largest bank-based financial services companies. Laurel Road is a brand of KeyBank National Association offering online lending products in all 50 U.S. states, Washington, D.C., and Puerto Rico. All loans are provided by KeyBank National Association, a nationally chartered bank. Member FDIC. For more information, visit www.laurelroad.com.
As used throughout these Terms & Conditions, the term “Lender” refers to KeyBank National Association and its affiliates, agents, guaranty insurers, investors, assigns, and successors in interest.
Assumptions: Repayment examples above assume a loan amount of $10,000 with repayment beginning immediately following disbursement. Repayment examples do not include the 0.25% AutoPay Discount.
Annual Percentage Rate (“APR”): This term represents the actual cost of financing to the borrower over the life of the loan expressed as a yearly rate.
Interest Rate: A simple annual rate that is applied to an unpaid balance.
Variable Rates: The current index for variable rate loans is derived from the one-month London Interbank Offered Rate (“LIBOR”) and changes in the LIBOR index may cause your monthly payment to increase. Borrowers who take out a term of 5, 7, or 10 years will have a maximum interest rate of 9%, those who take out a 15 or 20-year variable loan will have a maximum interest rate of 10%.
KEYBANK NATIONAL ASSOCIATION RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.
This information is current as of September 9, 2020. Information and rates are subject to change without notice.
3 Important Disclosures for SoFi.
4 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 2.98% APR (with Auto Pay) to 5.79% APR (with Auto Pay). Variable rate loan rates range from 1.99% APR (with Auto Pay) to 5.64% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of July 31, 2020, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 7/31/2020. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at [email protected], or call 888-601-2801 for more information on our student loan refinance product.
© 2020 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
5 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
Subject to floor rate and may require the automatic payments be made from a checking or savings account with the lender. The rate reduction will be removed and the rate will be increased by 0.25% upon any cancellation or failed collection attempt of the automatic payment and will be suspended during any period of deferment or forbearance. As a result, during the forbearance or suspension period, and/or if the automatic payment is canceled, any increase will take the form of higher payments. The lowest advertised variable APR is only available for loan terms of 5 years and is reserved for applicants with FICO scores of at least 810.
As of 10/15/2020 student loan refinancing rates range from 1.98% APR to 8.55% Variable APR with AutoPay and 2.99% APR to 8.77% Fixed APR with AutoPay.