A lot of estate planning advice focuses on how to pass on wealth to the next generation. This is important information, but ignores the fact that assets aren’t the only thing that are passed on after a death. Debts are often passed on as well.
A recent article in Time highlighted a new study that found “…73% of American consumers die in debt. The average total balance left over is $61,554 (and that includes mortgage debt). The numbers come from Experian FileOne and Credit.com, which examined the average debt of people who were alive in October 2016 but died in December 2016.
Of the 73% who died with debt, the most common kind of debt was from credit card balances. Mortgage debt, outstanding auto loans, personal loans and student loans followed, in that order. On average, the remaining unpaid balances included $25,391 in student loans, $4,531 in credit card debt, $17,111 in auto loans and $14,793 in personal loans.”
What happens to this debt depends on the type of the debt, whether anyone co-signed for the debt, and the size of the debtor’s estate.
When someone dies with credit card debt, the debt is typically paid off by the person tasked with administering the estate with assets from the estate. If there are not enough assets in the estate to pay off the credit card debt, the credit card company is out of luck.
Family members are not typically personally responsible for the credit card debt their loved ones left behind unless the account was a joint account.
Mortgage debt is one of the debts that is never forgiven if the debtor passes away. A surviving family member must take over the debt if the family wants to keep the home.
Car loans that are not fully paid off at the time of death do not pass on to surviving family members unless the family member is a co-signer to the loan, or volunteers to take on the remaining debt so that they can keep the car. If there is no loan co-signer, and no family member wants to take over the loan, the lender can repossess the car to satisfy the debt, or ask that the remaining debt be paid off out of the estate.
Personal loans or debts, like medical bills, are typically treated the same way credit card debt is. If there is a co-signer, that person is responsible for the debt.
If nobody but the deceased person was responsible for the debt, the creditor can ask the estate for payment. Debts like this are paid, and then whatever is left is distributed to the family or in whatever other way the estate plan says.
As you may have heard, student loans are typically not forgiven, even if you file for bankruptcy. They can also follow you around after death depending on their terms. If the loan is a federal loan, the loan will be forgiven if the debtor dies. If the loan is a private loan, whether it will be forgiven depends on the terms of the loan contract. If someone co-signed for the loan, they will be responsible for paying it off, no matter who the lender is.
If you are struggling to figure out what is going to happen to your loved one’s debt, you are not alone. It is a tricky subject. Don’t hesitate to reach out to our office if you need help figuring it all out.