Debts don't follow consumers beyond the grave, but they rarely vanish when the borrower dies. One of the business risks lenders face is that a borrower may die before he repays his debt. For lenders, this is an acceptable risk - especially when you consider that lenders can often collect the deceased's unpaid loan balance through his estate or through the loved ones he left behind.
Secured Loans
Secured loans are less risky for lenders because they require you to put up collateral to "secure" the debt. A lender can seize your collateral if you do not make payments on the debt as agreed. Examples of secured loans include mortgages and auto loans. If you do not pay your mortgage or car payment, the lender can foreclose on your home and repossess your car. If you die before paying off your secured loan, your family can keep the collateral that secures the loan only if it takes over the payments. If nobody makes the payments, the lender will seize the asset.
Unsecured Loans
Unlike secured loans, unsecured loans lack collateral. If you default on an unsecured loan, the lender cannot seize your assets in lieu of payment, but it can file a lawsuit against you. While lenders cannot sue deceased borrowers, they can file a payment claim with the probate court handling the individual's estate. The probate court then uses funds from the borrower's estate to pay off the remaining loan balance.
Student Loans
Although most loans you owe will survive your death, the National Consumer Law Center notes that your federal student loans will not. Upon your death, your family must submit a certified copy of your death certificate to the loan holder. The U.S. Department of Education will then erase your remaining loan balance. Your family does not have to pay it and neither does your estate.
Joint Loans
If your loan was a joint loan, or a loved one cosigned with you for the loan, responsibility for payment transfers to the joint account holder or cosigner upon your death. When you hold a joint account with another consumer, both of you are fully responsible for the debt - giving the lender the right to collect payment from either of you. Thus, if one account holder dies, the lender has the right to sue the surviving account holder for the debt. The same is true of cosigners. By cosigning, an individual pledges that he will pay off the debt if the borrower cannot. Should the borrower die, the cosigner remains responsible for repayment and the lender will collect the payment from him rather than from the deceased's estate.
Family Liability
Unless your loan was a jointly held account or you had a cosigner, it's unlikely that anyone other than you is responsible for paying off the loan. Your lender will try to convince your family otherwise. According to a 2009 New York Times Report, collection agencies often try to convince consumers to pay off their deceased loved ones' debts - even if they aren't legally obligated to do so.
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