What Happens to Your Unpaid Loans When You Die?

You work hard because you want to set your family up for the future they deserve. Unfortunately, there may come a time where you’re not there to share that future with them. Because of all the uncertainties that life presents, it’s never a bad idea to know what happens if you should die and leave unpaid loans behind.

Does your debt die with you?

In most cases, debt is not simply forgiven when you die. Instead, those outstanding balances become the responsibility of your estate. Per Investopedia Senior Writer Julia Kagan, your estate is merely your net worth at the time of your death. This includes everything from land and property to cash and investments to assets like collectibles and furnishings.

The Federal Trade Commission notes the executor of your will is responsible for settling your debt after death. If you do not have a will, a legally appointed administrator will handle your final affairs.

Per the FTC, any outstanding debt left is paid out of the value of your estate. In most cases, any debt that exceeds the value of your estate goes unpaid. While that means that you may not pass on additional financial burden to your family, you may leave them with considerably less than expected if you have major debt at the time of death.

Are there instances where your family has to pay?

There are some cases where unsettled debt will become the responsibility of your family. Among the common examples listed by the FTC are loans on which you co-signed with someone else, like a car loan or mortgage. If there is a balance left on these loans after your estate is settled, the co-signer will have to continue repaying it irrespective of the increased financial responsibility. This is also the case for any credit cards on which you’re a joint holder.

The spouse of a deceased person is also obligated to repay debt if they live in a community property state. These are the states in which, according to Investopedia contributor Tim Parker, couples must equally split all assets acquired during a marriage in the event of a divorce. There are currently nine states that qualify: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Community property states also mandate that outstanding medical debts be paid by a surviving spouse after death.

What to do about debt collectors

Although debt is typically not passed on to your surviving family, the Fair Debt Collection Practices Act stipulates debt collectors can contact certain people about outstanding debt. Per the FTC, this includes the spouse or parents of a child who died before reaching the age of 18. Debt collectors can also contact the guardian, executor, or administrator of your estate.

Debt collectors are allowed to contact other relatives, but only to ask for contact information for those who might be responsible for the debt. They’re typically only allowed to contact those people one time but can reach out again if they feel that they were given incorrect or incomplete information. If the collector discusses any details pertaining to debt with someone who doesn’t have the power to repay it, they can be sued.

You can stop debt collectors from bothering you even if there is a legitimate outstanding debt. According to the FTC, you must send a letter to the collector telling them to cease contact. Be sure to make a copy for yourself, send the original via certified mail, and pay for a return receipt. You can direct them to contact your attorney instead and use them as an intermediary as you settle the debt.

Nobody wants to think about their own mortality, but planning ahead to protect your family is a must. Talk to your attorney about what will happen after you die and what you can do to ensure the people you love most are protected.