Death and disability are often sudden and unexpected.
For survivors and loved ones, the loss of a primary breadwinner often brings financial hardship. What often causes the most financial distress is the amount of debt still owed.
One survey shows that 73 percent of consumers die with outstanding debt that averages $61,500 when mortgage debt is included; $12,900 if you don’t include mortgage debt.
Naturally, this prompts several difficult questions:
- What happens to someone's debt when they die?
- What debts are forgiven at death?
- What about if you become disabled?
Some people mistakenly believe that debts are retired or forgiven when a person dies or becomes disabled, but that's not always the case. Here's what happens to debt when you die.
The fate of your debt after your death depends largely on:
- The type of debt.
- Whether there’s a joint owner or account holder.
- Whether the debt is secured by property.
- Whether somebody is inheriting that property.
- The state in which you live at time of death.
In general, your debt becomes the responsibility of your estate following your death. Whoever is assigned as the executor of your estate will be in charge of settling your debts.
However, if there is a co-signor on any loan and that person is still alive, he or she now owns the debt and must repay it.
In community property states, all assets and liabilities acquired during a marriage are considered to be owned by both spouses, even if the spouse did not co-own, co-sign, or hold joint account status. This essentially means that in these states, joint ownership is automatically presumed by law.
Your surviving spouse is liable for all debts that occurred during the marriage in community property states, which include:
- New Mexico.
If you still owe money on a home mortgage, a joint owner or the person who inherits the house will be responsible for making the loan payments. They will not, however, be forced to pay the entire balance; they can simply take over payments if they choose. If the house is sold, the mortgage balance will have to be repaid by the sale proceeds.
If there’s a home equity loan on your house when you die and there’s not a surviving joint owner, the lender can force the person who inherits the home to repay the loan immediately, which could require selling the property. Some lenders, however, might work with the new owners and enable them to take over the payments.
Car loans can be repaid by selling the car and using the cash to repay the balance, or repaying it from the estate proceeds. An inheritor of the vehcile can also decide to continue the payment schedule. If payments stop, the lender can repossess the car.
One type of loan that is forgiven at death is a federal student loan. Private student loans, on the other hand, sometimes have to be repaid by either a co-signor or by the estate, though some private lenders will forgive loans upon death. In community property states, the surviving spouse will be responsible if the student loan debt was incurred during the marriage.
In some cases, you may be able to get rid of your student loan debt if you suffer a career-ending injury or illness. You can receive what is called a total and permanent disability (TPD) discharge if:
- Your student loans were part of a federal government loan program, such as the Federal Perkins Program or the Williams D. Ford Federal Direct Loan Program; AND
- You can prove that you are totally and permanently disabled by providing the U.S. Department of Education with documentation from the Department of Veterans Affairs (if you are a veteran), Social Security Administration, or a physician.
If any or all of your student loans originated from a source other than the federal government or you can’t prove permanent disability, then you will still be responsible for student loan repayment. However, many private student loan refinance companies will give you a grace period if you become disabled and suffer a loss of income.
If because of a disability you can’t work at all or have to work less, your other debts will remain your responsibility.
This is especially true if you own the property that secures a loan, such as your house and car. If you want to continue living in your home and still owe money on your mortgage, you must continue making payments or risk foreclosure. Your vehicle can be repossessed if you neglect payments.
For unsecured debt like credit card debt, you still are responsible for repayment. Something that does work in your favor is that many states protect private disability insurance benefits from being seized or garnished by creditors. And the federal Consumer Credit Protection Act protects a portion of your disability payments from collection.
For physicians, dentists, and other high-earning doctors, the best way to protect you and your family from loan default, collection actions, and adverse credit is to insure your income against the risks of death and disability.
Physician life insurance can provide the funds needed to pay off your debts and obligations if you pass away.
Similarly, physician disability insurance can provide the needed income to keep you from falling behind on your mortgage or car payments, racking up more debt, or being forced to find other sources for needed cash.
Still have questions that need answering?
What to Consider When Weighing Your Insurance Needs
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Joel Palmer is a writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.