When my grandfather passed away from a stroke, he left behind over $100,000 in debt and a basic life insurance policy that didn’t even cover the cost of his burial. My grandmother was not only devastated at the loss of her husband, but was also forced to figure out an estate that was in chaos. So what happens to debt after death?
Joint Account Holders are Responsible
If, when you die, you have credit cards, a mortgage, or even a car with both your name and someone else’s on the loan, that person is now responsible for your debt. My grandmother became responsible for around $25,000 in credit card debt and a $10,000 car loan, both of which she couldn’t afford to pay on her small income.
Unable to keep up with the bills, my grandmother went into collections and lost my grandfather’s truck. That ruined not only my grandmother’s credit score, but her self-esteem, as well. She felt like a failure, and she regretted ever having debt in the first place.
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Loved Ones Could Lose Their Home
My grandmother wasn’t a joint homeowner. However, in better circumstances, she could have inherited the house that she and my grandfather shared. Unfortunately, she had to sell the house because she couldn’t afford the mortgage payments.
Luckily, the house had a little bit of equity in it. As such, my grandmother managed to get some money back after selling. While this didn’t forgive the rest of my grandfather’s debt, it did help with regular living expenses and finding a new home for my grandmother.
Student Loan Debt After Death May Be Forgiven
My grandfather didn’t have any student loans, but they’re very common among many Americans. If my grandfather had died with unpaid student loans, my grandmother may have been able to get the loans forgiven.
Some private lenders forgive student loans after death, and federal loans are forgiven when you die. However, again, a living co-signer may be responsible for private student loans. Every lender is different.
Your Car Could Be Repossessed
My grandmother was the co-signer on a loan that my grandfather had on his truck. As a result, she was responsible for paying it. Otherwise she faced repossession. Because she couldn’t afford the monthly payments, plus insurance and other costs associated with owning a vehicle, the bank repossessed it.
She may have been able to sell the truck, but she would have still owed money, which she couldn’t afford. So instead she took the hit to her credit and is working to repair it to this day.
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Your Assets Are Safe
A 401(k) or IRA won’t typically be added to your estate after you die. Instead, one or both will go straight to your beneficiary. Many lenders won’t be able to go after your beneficiaries to pay the debts, even if they do inherit money from you. However, brokerage accounts vary state by state, so the beneficiary will need to talk to a lawyer.
My grandfather didn’t have much in his 401(k), but the little that he did have went straight to my grandmother. She tried to use that money to pay off the debts that they had. Unfortunately, it wasn’t enough. If my grandfather had more money in his 401(k) — or less in debt — my grandmother would’ve been a little less stressed after his death.
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Lenders Can’t Harass Your Family
Even with all the negatives that accompany dying with debt, there's one silver lining: If your family members aren’t joint account holders, they won’t be forced to pay your debts.
In fact, there are laws that keep lenders from harassing family members in the event of someone dying with debt. A lender can call your family to discuss the debt, but can’t force them to pay that debt if it isn't theirs. (Only co-signers are held responsible.) Your family can also send a letter to lenders asking them to stop calling.
A Final Thought on Debt After Death
My grandmother is now in a much better place financially than she was before. Still, it took more than five years to get there. She still misses her home, and she wishes that she had been more involved in the financial decisions that my grandfather made while he was alive. That is, perhaps, the one lesson my grandmother would like everyone to learn: Get involved and find help early to avoid a legacy of debt.
