When Francisco Reynoso’s son died shortly after finishing college, Reynoso was bombarded with debt collection notices demanding he pay back his son’s student loans.
Because Reynoso had co-signed on his son’s loans, he was now fully liable for repaying them — even as he grieved the loss of his son.
Reynoso discovered what many others have learned — that debt doesn’t go necessarily away go away when you die.
A number of factors dictate what happens to debt after death, including whether anyone co-signed on the loan, if the debtor had assets at death and what type of debt they held. The laws also vary from state to state.
Creditors are First in Line
Debt doesn’t typically melt away when you die.
Generally speaking, debts must be paid off by your estate when you die — if you have any assets. (We’ll get into co-signers, spouses and joint accounts a little later.)
For example: If you die with $100,000 cash in the bank, and $10,000 in credit card debt, that debt must be paid off before anyone receives an inheritance — creditors are first in line for a dead person’s assets.
“Your executor or administrator — the person in charge of your estate — will pay off those debts with the assets left behind before your family receives anything,” said Carmen Rosas, a California-based estate attorney.
“Paying those debts could mean simply writing a check from a bank account or selling assets for money to make those repayments.” Those assets can include the person’s home, cars or other valuable items.
The executor of your estate should notify creditors, credit reporting agencies and banks of your death as soon as possible. By notifying these agencies early, there’s a better chance your family will prevent someone from stealing your identity for financial gain.
Your executor can also request a copy of your credit report, which will tell them exactly what debts you had.
Creditors want — and expect — to be paid by your estate. They may make a legal claim in probate court, which is the legal process that oversees the handling of your estate.
Because it can take a while for your financial affairs to be sorted out, creditors may agree to a settlement with your estate for less than the total amount of debt.
“They’d rather have 40 or 50% now than to have to deal with all the hassle and uncertainty of waiting,” said John O’Grady, a San Francisco-based estate lawyer. “Creditors all want cash and they prefer immediate cash.”
If your assets don’t cover your debts, they typically go unpaid, according to the Federal Trade Commission.
Co-signed Loans and Credit Cards
If you have a co-signer on a loan, like a student loan, that person is responsible for paying off the debt if you die. The same is true for a joint credit card.
“Once you co-sign for any type of financial obligation, you are telling the bank that if the other person does not pay, you will be 100% responsible,” said Linda Kerns, an attorney in Philadelphia.
“My best advice for co-signing is that unless you are willing to pay 100% of the balance for which you are co-signing, you should not do it,” she adds.
This is what happened to Reynoso, who co-signed his son’s private student loans.
In some states, called community property states, it doesn’t matter if your spouse was technically a co-signer or not — your assets are considered joint. If one spouse dies, the other is responsible for paying off any debts that remain.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states. Alaska gives parties the option to make their assets community property.
If there’s no joint account holder and you don’t live in a community property state, credit card debt falls to your estate, which will use your assets to pay it off.
If you borrow money from the federal government for college and you die, that debt goes away — the loan is automatically canceled.
However, private student loans aren’t canceled upon death. The lender will attempt to collect from your estate.
Something to keep in mind: If debt is canceled or forgiven, that amount is taxable because it’s considered income by the Internal Revenue Service.
Some student loan terms say the loan will be canceled if the student works for a set period of time in a specific profession — those types of student loans are not taxable.
If you die and you have a mortgage, it doesn’t go away. If you co-owned the home with a spouse, the responsibility of the mortgage payments now falls solely to them.
If you were the sole owner, your estate may sell off your home to help pay off other debts. If all of your other debts are paid off, and you bequeathed the home to a family member, they’ll need to keep making payments to the bank or sell the house.
What If You Have No Assets?
If you die with debts and no assets (and no co-signers), the creditors are simply out of luck, O’Grady said.
“The best planning is to die with no assets,” he said. “Spend it, give it away while you’re alive, enjoy it and let people in your life enjoy it and die with nothing.”
Debt collectors may call members of your family after you die while attempting to collect on your debts — and they’re allowed to do this by the Federal Trade Commission.
Debt collectors cannot, however, mislead your family members into thinking they are personally liable for your debts after death.
And the FTC says they can only call your spouse or the executor of your estate when trying to collect. They can call other relatives, but only to help locate a spouse or the estate executor.
Your Turn: Have you considered what will happen to your debt?
Sarah Kuta is an education reporter in Boulder, Colorado, with a penchant for weekend thrifting, furniture refurbishment and good deals. Find her on Twitter: @sarahkuta.