If you have a mortgage on your house, what happens when you die?  What about a car lease or credit card debt?  Are your heirs required to pay off what you owe?

What is the financial legacy that you will leave behind?  Your legacy could be the bequest of property or money, but it could also mean inheriting debt. It’s not uncommon for spouses or others to get bombarded with collection calls from creditors asking to pay the bills of a family member who has died.  

So what do you do when the collection calls start pouring in?  Are you responsible for paying that $3,000 credit card bill that the collector keeps harassing you about?  In some situations, you may be legally responsible for the debt, but in many cases you are not. Getting a better understanding of the law can help you deal with bill collectors and avoid being bullied into an unnecessary payment.  

Credit Card Debt

So, are you on the hook for that $3,000 credit card bill? Yes, if you are a joint account holder. If you co-signed the application, you’re responsible for any outstanding balance whether you made the purchases or not. This law applies only to co-signers.  Any “authorized users” of the card are not legally obligated to repay the debt. This distinction is important to understand.

If the deceased was the sole owner of the credit card, then the estate is required to pay off the outstanding balance. If the estate doesn’t have sufficient assets to pay, the credit card company is out of luck. Family members are not responsible in this situation.

Mortgages and Auto Loans

Issuers of mortgages and auto loans have the house and the car as collateral for the loan. When a sole owner dies, the asset can be sold to pay off the debt. If the sale proceeds are insufficient, the estate of the owner is responsible for paying the difference.

As with credit cards, if you co-signed on the vehicle loan or mortgage, you will automatically be responsible for the outstanding balance. However, the financial institution that holds the loan cannot require the loan be paid off in-full because one of the co-signers died. The surviving co-signer can continue to make the scheduled payments as usual and can even refinance the loan.

Car Lease

Leasing is an entirely different situation. A vehicle lease is considered a debt of the estate. Like most people, you probably think you can return the car to the dealer and simply stop making the monthly lease payments. But that’s not the case. The death of the lessee is actually considered "early termination" of the contract, which means all remaining payments on the lease are due at that time. Contact the car dealer from which the lease originated as soon as possible. The dealer may be willing to work with the estate on payments for the remaining balance in exchange for payment of an early termination fee. 

Student Loans

What about student loans? It depends on the type of loan. If the borrower of a federally insured student loan dies, the remaining loan balance is forgiven. The same goes for parents who borrow through the federally insured PLUS program to assist with their student’s college expenses. If the parent dies, the loan is forgiven.

Unfortunately, private student loans are not generally cancelled. In addition, private loans usually require a co-signer. This means that if you’re a parent or spouse who co-signed the loan, you’ll be liable for the remaining loan balance. And, it gets worse. In some situations, lenders will demand the balance to be paid immediately.

Community Property States

Be aware that people who live in community property states may be held responsible for a spouse’s debt, even if the spouse was the sole owner. In these states, debts incurred by either spouse during the marriage are owed by the couple, even if only one spouse signed the paperwork for the debt. Currently, the U.S. has nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. 

Summary

To simplify, here’s a good rule of thumb. No matter what type of debt it is, if you were a co-signer, as the survivor, you are responsible for paying off the loan. If there were no co-signers, the estate becomes liable. If the estate doesn’t have sufficient assets to pay off the balance, the lending institution has no right to require others to pay the outstanding balance. But, beware!  Creative collection agencies may try to convince you otherwise!

Ryan Collier is the director of investment management for Bedel Financial Consulting Inc. For more information, visit their website at or email Ryan.