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What happens to personal loans when the borrower dies? The borrower’s estate or a surviving spouse may have to repay the loan, but what happens to a loan if you die is not always that simple.
What happens to personal loans when the lender dies? The borrower will likely still need to repay the remaining debt. But not always.
Here’s some context: In this post, the term “personal loans” goes beyond the type of installment loan known as a “personal loan” and encompasses loans taken out by a person or people rather than by businesses. It is a complex subject with laws varying by state.
What happens to a loan if you die? According to the Federal Trade Commission, debts do not in general go away because the debtholder has died. Typically, the debts are paid from the estate of the deceased person. There may even be a death clause in a loan agreement.
An estate includes the person’s real estate, cash, financial investments, vehicles and other assets. If there isn’t enough money in the estate, the debts often go unpaid although there are exceptions where someone else is personally responsible for the debt.
What happens to personal loans if the borrower dies? If the borrower has a will, it should list an executor. The executor is responsible for paying the deceased person’s debts out of the assets in their estate among other duties. If there isn’t a will, the court may appoint someone as executor or state law may contain a process in which someone becomes responsible for debt settling.
State laws vary on how debt payments must be prioritized. Most commonly, funeral expenses are first, followed by estate administration costs and then taxes and medical bills. It’s important to seek guidance about state laws where the deceased person lived.
What happens to personal loans when the borrower dies? In community property states, a spouse may be personally responsible for outstanding debts and, in some states, other laws exist that make a spouse responsible for certain types of debts, such as healthcare expenses.
People who can inherit debt include the following:
Here’s more about each type:
If you cosigned for someone’s debt and that person dies, you are typically responsible for that debt. This is not usually the case if you’re an authorized user on an account, such as a credit card.
If a debt collector tells you that you were a cosigner, but you believe that you were an authorized user only, the Consumer Financial Protection Bureau notes that you can ask the debt collector for evidence.
The situation for jointly held debt owners is similar to that for cosigners. If you were on a joint account with someone who passed away, you remain an account holder and will likely be responsible for debt payments.
If you were in a position where you were legally responsible for handling the debt, such as an estate’s executor and you didn’t follow proper procedures, you might find yourself legally obligated to pay the debt.
As noted, spouses living in community property states may be required to pay off a deceased spouse’s debts through commonly held assets. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin—and Alaska, if spouses chose this method of property owning.
In this section, we’re once again using the term “personal loans” to mean a non-business debt, which may or may not be a personal loan as the phrase is typically used.
What happens to personal loans when the lender dies? If the debt is on record, meaning that there is a contract involved, the borrower would typically still owe the money. It would become an asset in the deceased person’s estate and there could still be consequences for the borrower if the debt is not paid.
You can ask to see a copy of the contract, which would allow you to see the specifics of a loan agreement.
If a transfer of money occurs with the expectation of repayment, that is considered a loan that should be paid back. If there is a question about whether something was intended as a loan or as a gift, from a legal standpoint, there should be evidence that can be presented to show that it was a loan. If there isn’t enough evidence, the court will often consider it a gift.
Why get a personal loan? There are plenty of reasons to apply for a personal loan, including to pay legal expenses associated with estate planning.
Here’s some additional information about personal loans:
There are nine states with community property laws, in which a spouse may be responsible for the debt if a borrower dies. Those states are: In a tenth state, Alaska, a spouse may or may not be liable for the debt, depending on how the property was owned.
Alaska: Community property is optional in Alaska, but if the spouses opted to own property as community property, the spouse is responsible for the debt.
In a 10th state, Alaska, a spouse may or may not be liable for the debt, depending on how the property was owned. Community property is optional in Alaska, so if the spouses opted to own property as community property, the spouse is responsible for the debt.
What happens to a personal loan when you die? If there is a loan default because those responsible for the debt end don’t repay it, the lender or a collection agency will likely contact the person responsible for the debt and try to work out a repayment plan with them. If the loan was a secured loan and backed up with some type of collateral, the lender may take steps to seize possession of the collateral.
Defaulting on personal loans can be serious because it is a breach of contract. The default could affect the person’s credit report for up to seven years. It could even result in legal action.
Try to avoid a default on a loan. If you’re having trouble making payments, contact the lender to see if you can work out a payment schedule or negotiate a debt settlement .
The type of debt can play a role in how it’s handled. Loan types include:
Here is information by type:
Cosigners and joint credit card holders will almost certainly be held responsible for credit card debt. If the deceased person had an individual account, then it would largely depend upon whether they lived in a community property state or not.
What happens to credit card debt when you die is that in a community property state, credit card debt is considered to be jointly held. In common law property states, the debt shouldn’t typically pass on to someone else.
First, some context. Mortgages typically have a due on sale clause that means the loan must be paid in full before ownership can change hands; this isn’t applicable, though, if it’s transferred to an heir after a borrower’s death. (As with other kinds of debt, cosigners and co-borrowers would still owe the debt.)
If someone else inherits the house and is not a cosigner or co-borrower, then federal law allows the beneficiary to take over the mortgage—and the mortgage servicer must allow that, even if the person would not typically qualify for that mortgage loan.
If someone inherits a home where there is a balance on a home equity loan, that debt is typically inherited, as well. If multiple heirs each inherit a share of the home, the situation becomes more complicated and you may want to get legal advice, especially if there is disagreement among heirs about how to proceed.
In general, the deceased’s estate will pay for medical bills with exceptions, including when there is a cosigner or it's a community property state. More than half of the states also have something called filial responsibility laws. This means that adult children can be held responsible for supporting their parents who can’t afford to support themselves. This law is rarely enforced but is worth noting.
Car loans should generally be paid off by the estate. There may even be a death cause in the loan agreement. If there aren’t enough funds (and there’s no co-signer and it’s outside of a community property state), then the person inheriting the vehicle can make payments. If that doesn’t happen, then the lender may repossess the vehicle ; sell it; and return any excess funds over the outstanding loan amount to the estate.
Federal student loans will be discharged (considered paid in full) on the date of the borrower’s death. This applies to federal loans taken out by the student as well as parent PLUS loans taken out by a student’s parent. Private lenders, however, are not legally required to cancel student loans upon death, so the executor should check the agreement to see what the terms and conditions are.
The difference between private and federal student loans is that federal student loans are provided exclusively by the U.S. Department of Education, whereas banks, credit unions, online lenders, and select state-based or state-affiliated organizations may offer private student loans.
What happens to a personal loan when you die? Personal loans also pass onto the estate where they can be paid through the deceased person’s assets. Cosigners/co-borrowers/spouses in a community property state can still be liable for that debt, however. In that case, they will likely owe the balance remaining on the personal loan.
It’s important to know that there are two types of personal loans: secured and unsecured. If the loan is secured and backed with collateral, the lender may take possession of the collateral. However, most personal loans are unsecured, and will be repaid by the deceased person’s estate.
In general, when a borrower dies, the situation is handled through the person's estate, with cosigners, co-borrowers and spouses in community property states having responsibility for most kinds of debts. When a lender dies, the borrower typically still owes the money. Individual situations can become quite complex, so it makes sense to reach out for legal help.
Compare online personal loans at Lantern by SoFi.
