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Personal Loans When the Lender or Borrower Dies: Here's What You Should Know

Personal Loans When the Lender or Borrower Dies: Here's What You Should Know
Kelly Boyer Sagert
Kelly Boyer SagertUpdated February 8, 2022
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
What happens to personal loans when the borrower dies? This answer may not be as straightforward as you might think.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 Loan Debt When the Borrower Dies?

According to the Federal Trade Commission, debts do not in general go away because the debt holder has died. Typically, the debts are paid from the estate of the deceased person.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.

The Lender’s Estate Is Responsible for Settling Debts 

If someone 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.

Prioritizing Debt Payments 

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.

Spouse Bears the Responsibility of the Debts 

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. 

Who Can Inherit a Debt? 

People who can inherit debt include the following:
  • Cosigners
  • Joint account holders/owners
  • People who didn’t follow probate laws
  • Spouses
Here’s more about each type. 

Cosigners on a Loan

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. 

Joint Account Holders or Owners 

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. 

Those Responsible for Settling the Estate’s Debts Who Didn’t Follow Probate Laws 

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. 

Community Property State Spouse 

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.

What Happens to Debt After Death (By Type)? 

The type of debt can play a role in how it’s handled. Loan types include:
  • Credit cards
  • Mortgage loans
  • Home equity loans
  • Medical bills
  • Auto loans
  • Student loans
  • Personal loans
Here is information by type.

Credit Card 

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. 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.

Mortgage 

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.

Home Equity

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. 

Medical Bills 

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.

Auto Loans

Car loans should generally be paid off by the estate. 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. 

Student Loans

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 ave 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 terms and conditions are. 

Personal Loans

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. Here’s more information about what a personal loan is and the different types of personal loans.

What Happens to Personal Loans When the Lender Dies? 

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.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. 

How Do I Know It Was a Loan? 

You can ask to see a copy of the contract, which would allow you to see the specifics of a loan agreement. 

When Does a Loan Turn Into a Gift?

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. 

Personal Loans

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. These loans can be unsecured or secured (collateralized loans). If it’s the latter, here’s what can be used as collateral for a personal loan. These installment loans come with a specified interest rate and term with payments calculated so that you pay it off in full during the loan’s term. If you find that you didn’t need as long of a term, here’s information about paying personal loans early. 

The Takeaway 

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.You can compare rates for personal loans at Lantern by SoFi.
Photo credit: iStock/akinbostanci
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC0122076

Frequently Asked Questions

Do I have to repay a loan after the lender dies?
What happens to my loan when I die?
Do I still have to repay a loan to a dead lender when I am their only beneficiary?
What happens to my house if I cannot repay my loan before I die?

About the Author

Kelly Boyer Sagert

Kelly Boyer Sagert

Kelly Boyer Sagert is an Emmy Award-nominated writer with decades of professional writing experience. As she was getting her writing career off the ground, she spent several years working at a savings and loan institution, working in the following departments: savings, loans, IRAs, and auditing. She has published thousands of pieces online and in print.
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