Paying off debt can be the struggle of a lifetime — and beyond. So what happens to a person's debt once they die? Below, CNBC Select explains what happens to any unpaid loan balance and what you can do right now to make things easier for those you leave behind.
What we'll cover
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What happens to your debt when you die?
Ultimately, the fate of your debt after you pass will depend on the type of debt and the state you live in.
If the money you leave is enough to cover your outstanding debt balances after your death, then that amount will be deducted from your estate to cover the money owed. Of course, this means that surviving family members who are entitled to distributions from your estate will get less money.
If you don't have money in your estate to cover your debts, there's a chance that some of those balances will just never get repaid. This may depend on the type of debt you held, though.
Secured debt
Secured debt requires you to have collateral backing the loan, so in the event that you can't repay your balance, the collateral will be seized to satisfy that debt. If you pass away and leave behind a secured auto loan, for example, but don't have enough money in your estate, your car, which acts as collateral for this type of loan, can be seized or even sold to satisfy the balance.
Examples of secured debt include:
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Unsecured debt
This type of debt doesn't require collateral to protect the lender in case you can't make payments — credit cards are a common example. Unsecured debt may wind up unpaid if there isn't enough money in your estate to cover the balance. Authorized users on your credit card are not legally responsible for paying off the card's debt after your death.
Other examples of unsecured debt include:
- Student loans
- Personal loans
- Medical debt
Now let's say you and your surviving spouse or some other surviving family member co-signed on a loan and you pass away before you can pay it off. In this case, the co-signer will be on the hook for the rest of the loan.
This is only the case if you were both legally responsible for the debt (i.e., you were a co-signer or a joint account holder).
Keep in mind that in community property states, if either spouse takes on debt during the marriage, both spouses are responsible for paying it back. So if you applied for a new car loan before getting married, this doesn't become a joint debt after you're married. However, if you apply for a new credit card during your marriage, both you and your spouse would be on the hook for paying it off.
The nine community property states are:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
To get a more precise idea of what might be owed and by whom, consult with an attorney familiar with your state's estate laws.
How to pay down debt
Of course, the best way to make sure your debt doesn't outlive you is to come up with a plan for managing it and paying it off over the course of your life.
If you have multiple sources of debt, debt consolidation can be a solution worth considering. Debt consolidation involves applying for a personal loan that covers your total debt balance and using those funds to pay each of your creditors. This way, you'll only be responsible for paying back the one debt consolidation loan at one interest rate instead of having to juggle multiple balances with varying interest.
It's important to work with a lender that's a good fit. CNBC Select ranked SoFi Personal Loans as one of the best debt consolidation loan lenders because applicants can apply for as much as $100,000, which sounds appealing for those with much higher balances to consolidate. Plus repayment terms can be as long as 84 months, which is well above what the typical repayment term on a personal loan.
And Upstart is a solid option for those who need to borrow money but have fair or average credit scores. Of course, just keep in mind that the lower your credit score the higher your interest rate might be.
SoFi Personal Loans
Annual Percentage Rate (APR)
8.74% - 35.49% when you sign up for autopay
Loan purpose
Debt consolidation/refinancing, home improvement, relocation assistance or medical expenses
Loan amounts
$5,000 to $100,000
Terms
24 to 84 months
Credit needed
Good to excellent
Origination fee
No fees required
Early payoff penalty
None
Late fee
None
Terms apply.
Upstart Personal Loans
Annual percentage rate (APR)
6.20% - 35.99%
Loan amounts
$1,000 to $75,000
Terms
36 and 60 months
Credit needed
300 (but may also accept applicants with no credit history)
Origination fee
0% to 12% of the target amount
Early payoff penalty
No
Late fee
5% of the last amount due or $15, whichever is greater
You can also consider credit counseling, which can pair you with a professional who will take a deep dive into your finances and help you identify where to start your path back to solvency. Search the directories at the National Federation for Credit Counseling (NFCC) and the Financial Counseling Association of America (FCAA) to find accredited members who can help you.
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At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of loan products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
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