What Happens to Debt When a Spouse Dies (And How to Handle It Without Panic)
Learn all about what happens to debt after a person passes away. Don't burden your spouse or loved ones with your unpaid debts after you die. Make the right choices to protect your family from your debt when you're gone.
A spouse's passing away is one of life's most difficult experiences.
If you're dealing with the loss of your partner, you have my deepest sympathy.
Hopefully you have family and friends who can surround you with support.
I also hope you don't have to deal with complications around your finances, especially debt.
The unfortunate fact is, almost three-quarters of American consumers leave behind some form of debt when they pass away.
The most recent numbers indicate 73% of Americans who pass away leave debt behind.
The average amount they owe (including mortgages) is $61,554.
I've seen it happen to people I know, and if it's happening to you I'd like to offer some supportive information and advice.
I know there are ways to avoid the situation with little to no added work.
Whenever I take out a loan or a mortgage, I also take out additional term life insurance matching the loan length and the loan amount.
If anything ever happens to me, my wife and kids won't be burdened with paying off any of my debts.
When I die, I want my assets transferred to my wife and kids, not eaten up to pay off unpaid debts.
The idea they could be on the hook for debts not covered by my estate really bothers me.
Because of this, I've taken the time to research the best ways to prepare a family's finances to help ensure such fears don't become reality.
I'll tell you exactly what happens to debt when a spouse dies.
I'll also offer some solutions and tips for making sure any remaining debt wouldn't be a problem.
You can take measures to diminish the impact of your death on your spouse's life or, conversely, prepare for the impact you will experience if it is your partner who passes on.
With any matters of importance, you should always seek advice from a licensed legal professional in your state.
The information here is general, and can be found with simple internet searches, but we have compiled some of the best all-around starting points.
No one wants to be caught off guard by unexpected expenses or debts when either one of you leaves the other behind.
Types of Debt Left Behind
Some still haven't paid off their student loans when they die
According to the credit bureau Experian, nearly three quarters (73%) of all Americans leave behind some kind of debt when they die.
Excluding home loans, the average outstanding balance deceased people owe is $12,875.
Credit card balances were the most common form of debt left behind. Out of all the consumers who were reported as having debt when they died, 68% had unpaid credit card balances.
On average, these deceased credit card customers carry an unpaid balance of $4,531.
Outstanding mortgage payments. The second most common type of debt people fail to pay off before they die is mortgages.
37% of people who died still had mortgage debt.
The average outstanding mortgage debt upon death is $48,679.
Car payments still to be made. Car loans are the third most common form of debt left behind when a person dies.
A full quarter (25%) of people were still making car payments when they passed away.
The average car loan balance these people leave behind is $17,111.
Personal loans were left unpaid. 12% of people who died still owed a balance on personal loans.
For personal loans, the average outstanding amount still owed by people after they passed away was $14,793.
Some died before they could pay off their student loans. It's a little bit depressing to learn 6% of people still have unpaid student debt when they die.
It's sad to realize that, for some, student loan debt even follows them to the grave.
The average amount of student loan debt owed by deceased people was $25,391.
What Happens to Debt When a Spouse Dies
First, determine if the estate is solvent or insolvent
When a person dies, some of their debts become the responsibility of their estate.
The estate is basically every asset the person owned at the time of their death.
The point person for tying up all loose ends. An executor is a personal representative responsible for dealing with the last will and testament.
They also take responsibility for using the estate's assets to pay off any debts.
The lawful process of paying debts and then distributing what is left to the heirs is called "probate," which is enforced legally through "probate court."
The executor writes checks from the deceased's bank account or sells property or real estate to get the money to pay off debts.
Being solvent is preferred. When the assets are enough to pay the debts, the estate is known as "solvent."
Often some money or property is left over as inheritance, which the executor distributes to the heirs.
When an estate is insolvent it could get messy. If there aren't enough assets to cover the debts, the estate is deemed "insolvent."
The big question is: Who is responsible for the unpaid debt when the person who had it is dead?
Spouses can be on the hook for debts
Many couples work closely together when it comes to managing finances.
So it's fair to assume their finances are going to be closely intertwined.
There are three scenarios in which the spouse of a deceased person can be held responsible for paying the debts left behind.
Co-signing means the last one standing pays. If spouses co-signed on a loan, the surviving partner continues as the sole debtor.
Joint accounts don't disappear. When spouses set up joint accounts, the remaining person takes over responsibility for it.
It's important to note, though, that this doesn't include instances wherein a spouse is added as an authorized user on a credit card.
This is something we will keep in mind when we're making strategies to avoid passing on debt.
Also keep in mind when you are setting up a joint account with your spouse there are options you can choose to divide the account upon death.
Under these agreements, each spouse is responsible for their "share" of the debt.
Other legal details, like the state the couple resides in, the wording of the account documents, and the timing of when the accounts were set up could let one spouse off the hook.
There are nine states where debt is considered to be community property (where all property is shared in a marriage).
If you live in Wisconsin, California, Arizona, Idaho, Louisiana, New Mexico, Washington, Nevada, or Texas, the spouse is always held accountable for the deceased partner's debt.
In Alaska, couples are given the opportunity to choose to live under community property rules.
In terms of debts, the main exception to the community property rule is when the deceased spouse had taken the debt out before the marriage.
Also, if the spouse took out a separate mortgage on a home during the marriage using separate funds earned prior to the marriage, the debt isn't passed along to the survivor.
If the deceased spouse used separate funds to purchase part of a property and community funds for the rest, the survivor is not responsible for the portion purchased with the separate funds.
Here's how different kinds of debt are passed on to other people
When your spouse dies, a lot of things can happen to your mortgage depending on where you live and how you set it up.
Mortgage debt can be passed to the person who inherits the house. In the case of a house with an outstanding mortgage balance, the debt generally goes either to the joint homeowner or the person inheriting the house.
The executor can use the assets in the estate to pay off the remaining balance on the house.
If there isn't enough to pay off the mortgage, usually the joint homeowner or the person who inherits the house takes over mortgage payments.
However, if there are liens put on the home, for example by a second mortgage lender, the sale of the home could be forced to pay off the debt.
When a person who inherits a house can't afford mortgage payments, they will either sell the house on the real estate market, or default (in which case the lender will foreclose on the house).
Home equity loans might require the spouse to sell the house. For mortgages, it's against the law to make someone sell the house they co-owned to pay off the remaining debt when one partner dies.
Unfortunately, if a home equity loan was taken out on the house, the lender can force the joint owner or the person who inherited the house to pay in full immediately.
Often, such a scenario could require the sale of the home to get the funds to pay back the loan.
There are exceptions, for example in some states where homes can't be force-sold when there are still children living in it.
Like mortgages, there could still be an opportunity for the heirs to take over payments of the home equity loan.
Credit card debts are often written off. Credit cards are a form of unsecured debt (in other words, not backed up by a car or a home).
Credit card companies can be out of luck when a customer dies and there isn't enough in the estate to pay off the balance.
However, if the spouse was a joint cardholder, they will be responsible for taking over the credit card debt.
When someone is simply an additional authorized user on a credit card account, they're not responsible for the remaining debt.
Of course, for people living in states that view debt as community property, any credit card debts racked up during the marriage are the responsibility of the surviving partner.
Inherit a car and its payments. When it comes to an auto loan, if the estate can't pay it off, the car can be repossessed by the lender as final payment.
Whoever inherits the car can also choose to just take over the car payments.
Student loans can be forgiven (or not). There are two types of student loans: federal and private.
Federal student loans are automatically discharged when a person dies (including loans taken out by parents to pay for children's schooling).
Some lenders providing private student loans, including Fannie Mae and Wells Fargo, have the policy to forgive student debts upon death.
If there is a private student loan the estate can't cover with its assets, co-signers are responsible for the remaining debt.
In community property situations, the spouse is responsible to pay for their partner's private student loan debt if the loan was taken out during their marriage.
Medical bills are given priority. In the case of unpaid medical bills, some states (for example, Florida) give precedence to paying these debts first through the estate.
If the estate is insolvent and there are unpaid medical bills, the bad debt is usually just written off.
Some jurisdictions allow medical institutions to go after spouses or adult children for their spouse or parent's unpaid bills when the estate can't cover them.
States with community property policies have varying rules when it comes to medical bill debts.
Some consider the debts owned by the marital community, while others don't.
Plan for the Inevitable
It's not the most pleasant task, but planning to make sure your death doesn't threaten the financial stability of your spouse or children is something everyone should do.
Get and review your credit report. The first thing the executor of your estate is going to do is obtain your credit report to find out what debts remain outstanding.
You should always look very closely at your report and make sure there aren't any surprises.
Make sure you're going to be solvent. It's also possible to take your credit report and tally up all your remaining debts.
Then you should add up the assets you own to determine if they would cover the debts.
If it looks like you're going to be solvent, you have little to worry about.
On the other hand, if your pending estate doesn't currently cover your debts you should be taking measures to protect your family from creditors.
Separate your credit card accounts. You and your partner probably merged your finances after marriage.
As you age and the likelihood of your death increases, you should consider separating your credit card accounts.
You don't have to close your joint credit card, just stop using it.
If there's an annual fee you might want to close it, even though it will harm your credit score.
Apply for your own individual cards. Each partner can apply for their own credit cards.
If there's an outstanding balance on the joint account, one spouse should choose a new account with a 0% APR intro rate on balance transfers, then move the balance over.
Add an authorized user. Remember, additional authorized users aren't responsible for the primary cardholder's debt.
Each partner should add their spouse as an authorized user.
Both will have the ability to use either card.
When one partner dies, the surviving spouse shouldn't use the card issued in the deceased's name (that would be fraud).
Have the executor cancel the account.
When couples get married and start managing their finances together, one of the most important things they do to protect against a worst-case scenario is to take out insurance.
The single best way I've learned to make sure my wife and kids are not shackled with debt after I die is through strategic purchases of term life insurance.
For every debt I've incurred, from my mortgage to my car loan to my credit cards, I set up term life insurance to cover unpaid balances should I die.
Whether you're newlyweds just figuring out your personal finances, or have been together for many years, you should have life insurance to protect your partner.
Life insurance protects in two ways. First, your family is protected from getting hit with the costs to repay your debts.
Second, the estate assets you would prefer to pass on to your loved ones are not eaten up by the repayment of debts.
Choose term life with the same term as the loan. What I've learned is to purchase term life insurance every time you set up a loan or credit.
Term life insurance provides the beneficiaries a benefit payment upon the death of the policyholder.
You sync the term of the insurance with the length of time it will take to pay back the loan.
Here's how using life insurance to protect your family works. Let's say you're taking out a mortgage for $300,000. You plan to pay it off over 25 years.
At the same time as you open the mortgage, you should open a term life insurance policy for yourself, naming your spouse or children as beneficiaries.
Insure yourself for $300,000 over a 25-year term.
If anything unexpected happens to you, your mortgage will get paid off by the beneficiaries, who will keep whatever is remaining.
Insure all credit you take out. You should do the same for car loans, personal loans, and even credit cards with high credit limits or balances.
Life insurance benefits aren't subject to the probate process, which means they can't be taken away from the beneficiary by the executor to pay down debts.
Retirement savings are also protected. Another tip is to put money you don't want creditors to go after into retirement savings.
Retirement savings (just like life insurance death benefits) are not part of the probate process.
If you have money in 401(k)s or IRAs, your spouse is automatically the beneficiary of those accounts, and they can't be rolled into the estate to pay off debts.
What the surviving spouse should do if debt collectors come knocking
Even when a spouse is not on the hook for the death of their deceased partner, unscrupulous debt collectors might still pursue them for unpaid debts.
It could get personal. Debt collectors have been known to try to guilt the surviving spouse into paying.
They say it's just the right thing to do and suggest it's what the dead partner would have wanted.
Don't be intimidated! Do not bend to the incessant, hardball tactics the collection agencies use.
Unless there is a legal basis for contacting the surviving spouse, there is no reason to fear the debt collectors.
For all estate inquiries, see the executor. You should direct debt collectors, or any other creditors looking for repayment, to the executor of your deceased partner's estate.
It's not your debt, it's the estate's debt.
Write a letter. Send a letter to the collection agency formally stating you do not want to be contacted again regarding your spouse's unpaid debt.
Send it via certified mail and ask for a return receipt to confirm it was received.
Get Help When You Need It
If a spouse just lost their life partner, they've already gone through one of the most traumatic experiences a person can go through.
Having to deal with the messy consequences of debt left behind can mean going through trauma a second time.
For many couples, managing finances was something they always have done together, so going it alone can be daunting.
It's definitely OK to seek out help to navigate the sometimes-complicated rules of estate debt settlement.
When in doubt, talk to a lawyer. If you live in a state where community property is the law governing estates, you should probably talk to a lawyer.
The rules are different from state to state, which makes it even more complicated.
Find a consumer law attorney, or a probate lawyer, to help you through the process.
The lawyer can also help you with other complicated issues associated with your loved one's death.
Other legal issues include inheritance tax, transferring Social Security benefits, and claiming state-held money owned by the deceased.
Ask the creditors for help. The deceased spouse might have had no problem keeping up with minimum payments and paying fixed installments on loans.
It could be a different story for the surviving spouse, especially if there was income being earned by the departed partner.
If the living partner is struggling to keep up with debts, they can reach out to the creditors, explain the situation, and see if they can work something out.
For example, the spouse can ask for options providing more time to get organized for repayment.
A revised repayment plan could also be developed to make the debt more manageable.
'Til debt do us part
I've learned how important it is to take the right steps to make sure your loved ones don't experience financial ruin in the wake of your death.
I don't plan to die anytime soon, but if the worst happens, I know my family would be protected.
Taking term life insurance out in parallel to loans is the single best piece of advice I can offer.
Reviewing your credit score and separating joint credit cards into separate accounts with an added authorized user are also great tips every couple should consider.
These tips become more and more important as couples age and move into the latter phases of their lives.
After all, you don't want the legacy you leave behind to be a burden of debt for your family.
The idea that my wife and kids could be on the hook for debts not covered by my estate, should I perish, is troubling to me. And I know you feel the same about yours.
For 20 long years, through my company, CreditLoan, I've been teaching consumers the ins and outs of a wide range of financial topics while providing the tools and solutions they need to effectively manage some of their financial woes.
So we do hope you found something worthwhile from this guide.
Are you confident you'll be able to pay off your debts before your time is truly up?
Are you someone who'd rather leave debt behind after death?
What have you done, so far, to mitigate the risk of burdening your family with debt?
Let us know in the comments below!