When a Loved One Dies, What Happens to Their Debt?

Nothing could have prepared Pastor Jim for the phone call he received at 1 a.m. His brother, Paul, was on the line with heartbreaking news: Their 60-year-old mother had passed away suddenly.

In the days that followed—through the shock, the tears, the funeral, and the burial—Jim and Paul found themselves facing another emotional challenge: settling their mother’s estate.

She had been a single mom, widowed young, and had raised her two sons with strength and love. At the time of her passing, she still had five years left on her 30-year mortgage, a $9,000 credit card balance, and an outstanding car loan.

Amid their grief, Pastor Jim wished the debt could simply vanish. But as beneficiaries of their mother’s will, he and Paul had to face some tough questions: Which debts still needed to be paid? How would they be paid? And could any of them be forgiven?

These are questions many people face when a loved one dies. You may inherit their home, savings, and personal belongings—but what about their debts?

Do Heirs Inherit a Loved One’s Debt?

Let’s start with the basics. Before any inheritance is distributed, the estate must first settle any outstanding debts that aren’t eligible for forgiveness. The estate includes everything the deceased owned—property, savings, and personal items. Here are the main types of debt that typically must be paid.

Secured Debts: These include mortgages and car loans that are tied to specific property. Heirs can choose to:

• Refinance the loan
• Continue making payments
• Sell the asset to pay off the debt
  

Joint Debts and Co-Signed Loans: If you co-signed a loan or shared a credit card or mortgage, you’re still responsible for the balance.

Debts in Community Property States: In certain states, spouses may be liable for outstanding obligations incurred during the marriage—even if the debt was in only one spouse’s name. These states include:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

Additionally, Alaska, South Dakota, and Tennessee allow couples to opt into community property rules through legal agreements.

Which Debts Might Be Forgiven?

Now let’s look at debts that may not need to be repaid.

Federal Student Loans: These are automatically discharged when the borrower—or the parent in the case of PLUS loans—passes away. Survivors are not responsible.
Note: Private student loans may not be forgiven, and co-signers could still be liable.

Unsecured Debts with Insolvent Estates: If the estate doesn’t have enough assets to cover debts like credit cards, personal loans, or medical bills, those debts may be forgiven. All states have rules about the order in which outstanding obligations are paid, but the specific rules vary by state. Funeral and administrative costs are paid first. Secured debts (like mortgages) follow. If there is money left in the estate, unsecured debts (like credit cards) are settled. If the money runs out before the estate pays unsecured debts, those debts are typically written off.

What Assets Are Protected from Creditors?                                                                                                       

Some assets are off-limits to creditors and don’t have to be used to pay off debts:

• Retirement accounts (401(k), 403(b), IRAs, HSAs)
• Life insurance payouts to named beneficiaries
• Property held in a living trust
• Brokerage accounts (taxable investment accounts)

The Happy Ending to Pastor Jim’s Story

Jim and Paul consulted their mother’s estate planning attorney, who confirmed that her estate would pay her credit card debt. They chose to sell her home, and Jim took over the car and its loan.

During the six months it took to sell the house, they were responsible for the mortgage payments. Thankfully, their mother had planned ahead—her savings covered the mortgage until the sale was complete.

Final Thoughts

If you’re navigating a loved one’s estate, it’s wise to speak with an estate planning or probate attorney to understand your responsibilities. If debt collectors contact you, a financial planner can refer you to resources that can help you understand your rights and protect your interests.

And when it comes to your own estate planning, consider how you can ease the burden on your heirs. Talk to a financial planner about strategies to manage your debt and fund your estate to cover your outstanding obligations, so you can protect your loved ones from unexpected financial stress.