What Happens to Debt after Death?

While it may not be the most pleasant thought to consider, for the growing number of people with long-standing financial obligations, many often wonder what happens to that debt after we pass away.

The notion of one’s family or heirs being left responsible for debts has always clouded estate law cases, and can often lead to traumatic conflicts among family members still grieving from a recent death. They can also spin into credit issues for those left to take care of the financial burden.

Those complex and awkward issues have been fought among lawyers, surviving family members and creditors for years, but there’s a new wrinkle that might have broader impact to an even wider range of Americans – and that’s the legacy of student loans after the borrower passes away.

Student Loans that Last Forever – Literally

With more than 40 million Americans holding student loan debt that’s reached an incredible $1.4 trillion dollars – the average college graduate owing $37,172 in student loans – the question of what happens to that debt after death has become more common.

Not so long ago, student loans were a controllable convenience designed to be easily paid off when a graduate used his or her enhanced employability to pay off those obligations as quickly as they could.

Nowadays, with ever-rising college tuition rates and huge numbers of Americans returning to school for retraining, student loan debt continues to grow … and linger as a long-standing debt burden to many who are only able to pay the minimum for years. There are even many retirees who must now include student loan debt as one of their ongoing financial concerns.

The partially good news is that responsibility for student loan obligations after the death of the loan-holder depends on the type of lender and the source of the loan, with some debts able to be easily discharged. Others, not so much.

Federal student loans are simply discharged when the loan-holder passes away, though survivors will have to provide a death certificate to the loan servicer. The same goes for Parent PLUS loans, which are also federal loans – if either the signing parent or the loan-holding student dies, the obligations are usually discharged. There could, however, be tax implications for surviving parents as the IRS may consider the canceled debt to be taxable income.

Challenges with Private Loans

Private student loans, especially loans that have been modified or refinanced, are a more difficult debt to deal with in the case of a death. While many private lenders offer a death discharge as part of their legal documentation, others may try to get money from an estate. But if those loans are in only the borrower’s name, children and surviving relatives are generally not held liable for the outstanding balance.

More challenging is if a private student loan (or nearly any form of personal loan) has been done with the help of a cosigner, as that person becomes legally liable for repaying the balance after the death of the student. What’s worse, even if you’ve paid your student loan balances on time up until that point, death of the loan-holder can trigger default, which means that the entire balance of the loan is due immediately.

Experts suggest that those who’ve demonstrated the ability to pay their loans and assume the responsibility for the debts for many years try to arrange a cosigner release, which removes the financial liability from your cosigner in the case of your untimely death. A life insurance policy may be another option to help ease that burden.

Finally, married couples need to realize that if they live in one of the nine community property states in the U.S. – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin – there is a chance that a surviving spouse might be held responsible for their partner’s student loans debt taken out during the course of the marriage.

Responsibilities for Other Debts

As for other, more traditional debt streams, such as credit cards, bank or car loans or other debts owed, the responsibility for repayment varies widely.

Typically, credit cards that are solely in the name of the deceased mean those debt obligations are strictly connected to that individual, not their children or family members. This is not to say that a particularly ambitious credit card company or bank will not try to come after a deceased person’s estate; here, again, having an estate lawyer can become a critical tool in protecting assets for survivors.

As with student loans, surviving spouses in community property states can, however, be held responsible for family credit card debts, so it’s often worth a call to see if a debt reduction or forgiveness plan is possible to reduce those balances.

The executor of a will, the person determined to be responsible for handling an estate, becomes responsible for dealing with these sorts of debts, and experts suggest that any relatives who are contacted or hassled by debt collectors refer those inquiries to the executor or designated legal counsel.

And challenging as it may be, spouses or children are encouraged to immediately stop using any credit cards or similar financial resources in the deceased name, and close those accounts.

A further important step is to contact the credit bureaus as quickly as possible to help contain the estate issues and, at the same time, also help prevent identity theft issues from occurring.

Estate disputes can be tricky but heirs will be glad to know that even the most adversary of debt collectors will often be placed at the bottom of the list of parties to be paid out by an estate – and if the proceeds have run out, those lenders will simply be out of luck.

If you’re concerned about the possible impact of a loved one’s death on your own credit score, we can provide professional advice on the matter.

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