#What happens to your loan debt after you die?

Loans without collateral — such as personal and student loans — are usually treated as a last priority when it comes to paying off your creditors after you die. While your family likely won’t be responsible for paying off those debts, having unpaid loans can still eat into their inheritance. In some cases, your spouse may be partially responsible for paying off your debt.

If you have either of these debts — or have cosigned on to a student loan — there are some steps you may want to take to protect your heirs. Consolidating your personal loans for a lower rate, removing yourself as a cosigner on private student loans and appointing an expert to manage your estate are a few examples.

However, because the laws around debt and inheritance vary by state, consider working with a lawyer or credentialed financial advisor while planning your estate. If money is a barrier, you might be able to find low-cost or free legal help through your local bar association.

What happens to your personal loans after you die?

Like other types of debt, personal loans are typically paid out of your estate when you die. This means that after you die, the person handling your estate — called the executor — will use your assets to pay off your creditors. If there isn’t enough money in the bank to pay down your debts, your executor may sell off other assets, like stocks or home equity, to pay off your creditors.

However, there are a few cases where your personal loans may not go to the estate at all. Here are a few common situations where someone may be responsible for your loan repayments:

• Someone cosigned your personal loan — in that case, your cosigner would pick up the repayments where you left off.

• You applied for a personal loan with a joint applicant — in that case, the joint applicant would take on the responsibility for paying off the loan.

• The executor of your estate didn’t follow the state’s order of claims when paying off your creditors — in that case, they may be personally liable for some of your debts.

If there isn’t enough money to pay off your debts, then your estate is considered insolvent. In most cases, your creditors will have to assume the loss. However, depending on where you live, your spouse may be responsible for paying off your personal loans.

How state laws affect what happens to your personal loans

If your estate is insolvent, your state’s debt priority order may determine whether or not your personal loans are paid off when you die. The order that your executor must follow varies depending on your state, but generally speaking, unsecured debt — including personal loans, private student loans and credit card debt — is the last priority.

For married folks, this could mean that your spouse is responsible for your personal loans after you die. This depends on whether you live in a community property state.

Living in a community property state at any point during your marriage could make your spouse responsible for paying some or all of your personal loan debt after you die. A community property state is a state where spouses share all debts and earned assets taken on after marriage — while living in that state.

Currently, there are nine community property states:

• Arizona

• California

• Idaho

• Louisiana

• Nevada

• New Mexico

• Texas

• Washington

• Wisconsin

Domestic partners in California, Nevada and Washington are also subject to community property laws.

If your estate can’t pay off a personal loan that you took out while living in a community property state during your marriage, your spouse may be responsible for some of that debt. However, they will only be responsible for paying off your debt using assets that you legally share — that is, assets earned during your marriage while living in a community property state.

This means that creditors can’t go after your spouse’s inheritance, gifts or assets they purchased with money they earned before your marriage. They also can’t go after any money your spouse earned while living outside of a community property state. Same goes for money they earned before you were married.

Took out the personal loan before you got married? That’s considered separate property. Your spouse won’t be responsible for paying it off at all.

Community property law can get tricky, especially if you mixed your assets with your spouse’s. Hiring an estate attorney can help your spouse make sense of the law and understand what they are and aren’t responsible for paying.

What happens to your student loans after you die?

What happens to student loans after you die depends on the type of student loans you have. Let’s take a look at how creditors treat different types of student debt.

Federal student loans

Federal student loans are discharged when you die. To qualify for discharge, someone must submit documentation with proof of death to the company handling the federal loan repayments. Typically servicers accept the following types of documentation as proof of death:

• Your original death certificate

• A certified copy of your death certificate

• An accurate and complete photocopy of your death certificate

You can find your loan servicer by logging into the Federal Student Aid website or calling the Federal Student Aid Information Center at 800-433-3243.

If you think your federal student loans may outlive you, make sure that your family and executor are aware of which company services your loans so they can easily apply for a death discharge. If you or your family have any questions about discharging your loan after death, you should contact the servicer directly.

Parent PLUS loans

Parent PLUS loans are a type of federal student loan that are also eligible for discharge due to death. Because these are loans taken out in the parents’ name for the benefit of a child, they can be discharged when the parent or the child dies.

Unlike cosigned or joint loans, this means that your children will not be responsible for repayments on a Parent PLUS loan if you die. And if a parent took out a PLUS loan in your name, they will not be responsible for the payment anymore if you die before them. Even if you had an endorser on your parent PLUS loan, they will not assume the debt.

Private student loans

What happens to your private student loans depends on your lender. Some offer discharge due to death, while others do not. If your provider has student loan discharge due to death, your cosigner generally isn’t responsible for repayments.

Here’s are some top private student lenders that discharge student loans when the borrower dies death of the borrower:

Cosigned private student loans

Generally, private student loan companies do not forgive loans due to the death of a cosigner. In fact, the loan may require immediate full payment or go into default when you die if the contract contains an automatic default clause.

While automatic default clauses are rare, it’s worth looking over the contract of any student loans you’ve cosigned while getting your affairs in order. Here are a few steps the borrower may want to take to protect themselves if you find an automatic default clause:

• Apply for cosigner release, if it’s an option. Some lenders allow borrowers to apply to have a cosigner removed from their loan after two to three years of on-time repayments.

• Refinance with a provider that doesn’t have an automatic default clause. This involves taking out a new private student loan fully in their name to pay off the balance of the previous loan.

• Add a new cosigner, either by negotiating with the lender or refinancing the loan with another provider.

Related reading in this series

How to avoid passing on personal or student loan debt

Here are a few steps you can take to avoid passing on personal or student loans to your family.

• Refinance your private student loans to a provider that offers discharge due to death if you live in a community property state. Avoid adding a cosigner, if possible.

• Apply for cosigner release on your private student loans, if your servicer doesn’t offer discharge due to death on loans with cosigners.

• Consolidate your personal loans for a lower rate by taking out a new loan to pay off your current loan. This will help you pay down the debt more quickly and at a lower cost during the remainder of your life.

• Consolidate your personal loans to protect your spouse. If you are married and have moved out of a community property state since taking on the loan, debt consolidation can protect your spouse from inheriting that debt.

• Remove any cosigners or joint borrowers from your accounts, if possible. You can do this by negotiating with your creditors or applying for a debt consolidation loan in your name.

• Take out a life insurance policy to help your spouse handle repayments on any debt they might be responsible for. Life insurance can be helpful because it goes directly to the beneficiaries, rather than the estate.

Make sure your family members are aware of their legal responsibilities when it comes to assuming your debts after they die. This can be simple as making sure they have a legal expert to contact if creditors reach out to them demanding repayment.

Working with an estate attorney to draft a will is a solid way to ensure your affairs are in order before you die. An attorney may have additional tips on how to avoid passing on debt according to your state and local laws — as would a credentialed financial advisor.

While drafting your will, avoid appointing inexperienced family to execute your estate. Following the state laws can be challenging for someone who isn’t familiar with the law. If they make a mistake, they could be liable for repaying some of your debts.

Dig deeper: What is a debt consolidation loan — and how can it help you lower your interest rate?

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What happens to other types of debt after you die?

What happens to other debts after you die depends on the type of debt. Some are treated like personal loans, while others are not:

• Federal or state government debts typically get priority over other types of loans and credit accounts and are paid directly out of the estate. If the estate is insolvent, your spouse may be responsible for the debt, depending on the situation. Tax debt, for example, is typically your spouse’s responsibility if you filed a joint return.

• Mortgages typically are paid off by the estate before other types of debt. Since mortgages are tied to an asset that can have multiple heirs — and a cosigner — it can be difficult to parse who bears responsibility for payments. In cases where nobody claims the house, the lender will often foreclose on the property.

• Credit card debt is generally treated like a personal loan. Joint account holders and cosigners assume responsibility for your credit card balance after you die — but not authorized users.

• Medical debt is generally treated like a personal loan, with a few exceptions. Medical bills related to your most recent illness may take priority over other unsecured debts during probate. And in some rare cases, filial responsibility laws may make your children liable for some unpaid medical bills, depending on where both of you live.

Dig deeper: What happens to your savings accounts after you die?

About the writer

Anna Serio-Ali is a trusted lending expert who specializes in consumer and business financing. A former certified commercial loan officer, Anna’s written and edited more than a thousand articles to help Americans strengthen their financial literacy. Her expertise and analysis on personal, student, business and car loans has been featured in Business Insider, CNBC, Nasdaq and ValueWalk, among other publications, and she earned an Expert Contributor in Finance badge from review site Best Company in 2020.

Article edited by Kelly Suzan Waggoner