What Happens to Your Debts When You Die

So, you've died. Congrats, you're finally debt-free! Unfortunately, things are now a bit more complicated for your relatives. When someone dies, their debts don't simply disappear. Instead, for the most part, they become part of the deceased person's estate—the collection of all assets and liabilities left behind. Understanding how these debts are handled is crucial for both estate planning and managing inherited responsibilities. Let's take a look at what exactly happens when you die with debts to your name, and what you can do to ensure your family members are not left with an unwelcome surprise. And, of course, none of this is legal advice—it's simply an overview of what happens, generally speaking, to your debts when you die.

First off, the probate process

After death, the estate goes through probate. This is the legal process where an executor is appointed to manage the estate, assets are identified and valued, valid debts are paid, and remaining assets are distributed to heirs. During probate proceedings, any outstanding debts must be settled using property and funds from the estate. Heirs receive no inheritance until debts are settled.

Most states require debts to be paid in this order:

1. Funeral expenses

2. Estate administration costs

3. Federal taxes

4. Medical bills from final illness

5. Secured debts

6. Unsecured debts

If the estate lacks funds to pay all debts (aka an insolvent estate), debts are paid according to priority order. Lower-priority creditors may receive partial payment or nothing, while remaining debts typically die with the deceased.

Some assets bypass probate and are protected from creditors. These include life insurance proceeds, retirement accounts with named beneficiaries, assets in living trusts, and property held in joint tenancy.

Types of debts and what happens to them

Now that we know the order of debts that need to be paid, let's take a look at how different types of debt are handled.

Federal student loans

• Automatically discharged upon death

• Death certificate must be submitted to loan servicer

• Private student loans may have different rules; some require payment from the estate

Credit card debt

• Paid from estate assets

• Not inherited by family members unless they are: co-signers on the account, joint account holders, or required by state law (in community property states—more on that below)

Medical bills

• Estate is responsible for payment

• May be negotiable with healthcare providers

• Family members generally not liable unless they signed financial responsibility forms or live in states with specific filial responsibility laws

Mortgages and home loans

• Property can transfer to heirs, but the mortgage remains

• Options for inheriting family members are to assume the mortgage and continue payments, refinance the loan, or sell the property to pay off the debt

Car loans

• Similar to mortgages, lender may allow loan assumption by qualified heirs

• Vehicle can be sold to satisfy the debt

Impact on family members

The good news is that relatives are not typically responsible for repaying the debt of someone who’s died, unless:

• They're a co-signer on a loan with outstanding debt.

• They're a joint account holder on a credit card. (Note: This is different from an authorized user.)

• They're a surviving spouse and your state law requires spouses to pay a particular type of debt.

• They're the executor or administrator of the deceased person’s estate and your state law requires executors or administrators to pay an outstanding bill out of property that was jointly owned by the surviving and deceased spouses.

• They're a surviving spouse and you live in a community property state that requires surviving spouses to use jointly-held property to pay debts of a deceased spouse. These states include Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

If there was no co-signer, joint account holder, or other exception, only the estate of the deceased person owes the debt.

Preventive measures

While you can't plan for an unexpected death, there are steps you can take now to protect heirs from debt complications. The most obvious step is to maintain adequate life insurance. Even if you're young and healthy now, you could still need a plan. Make things easier for your loved ones by keeping detailed financial records and regularly updated beneficiary designations. Finally, consider creating a living trust, and consult with estate planning professionals.

If you're the family member of someone who recently left debt behind them, consider consulting a probate attorney. Don't automatically pay debts from personal funds, and always request debt verification in writing while keeping detailed records of all communications.

Debt settlement is tricky enough while you're alive. Understanding what happens to your debts when you die is the best way you don't leave a mess for your estate once you're gone. For more, here's how to talk to your kids about your estate plan now.