What Happens When You Die with Debt?

Certain kinds of debt die with you, but others will have a big impact on your heirs. If you know the difference, you’ll know what steps to take.

Many Americans have unpaid debts when they die. A study reported by Credit.com says that as many as 73% have debts on death. “Dying with debt: Advice from experts,” an article in the Richmond Free Press, reports that those who die with debts have an average balance of $12,875 without a home loan, and if you include mortgage debt, the number jumps to $61,000.

Among the consumers who had debt when they died, about 68% had credit card balances. Here’s the rest of the list:

• Mortgage debt  37%
• Auto loans           26%
• Personal loans   12%
• Student loans    6%

In most states, debt isn’t passed on to your spouse and children when you die. Debt typically belongs to the deceased person or that person’s estate. But if your spouse or someone else co-signed or was a co-applicant on a credit card or a loan, they’ll be on the hook for any debt when you die. They may also not inherit anything because your estate becomes liable for your debt. Creditors can try to take any funds you leave behind to pay off your balances. If you have enough to pay the debts, the creditors get paid and beneficiaries receive whatever’s left. The creditors will get paid at the expense of the heirs.

If there’s real estate in the mix, it can be sticky. If a home’s your only asset, and it’s where your spouse or children also live, creditors can ask for a sale to cover your outstanding liabilities. Your surviving spouse or other relatives might have to sell the house to pay debts, such as outstanding mortgage payments—or they’ll have to assume your debts to keep the house.

One way to avoid this type of hardship is to purchase life insurance to help with your debts. In addition, you should draft a will. You may also consider setting up a trust to provide ongoing management and assurance that children or others will end up with your assets.

While you’re working with your estate planning attorney on the will and the trust, ask for two powers of attorney, if you become disabled or mentally incapacitated before you die. One POA is to allow a trusted party to make decisions on your healthcare needs, and the other to allow a trusted individual to handle your financial affairs.

An important part of your estate plan should include a living will. This gives your doctors directions about what you want to happen at the end of your life, if you are unable to speak for yourself due to either illness or injuries sustained in an accident. Don’t leave out a written HIPAA form; this is to allow other people, most likely family members, to be able to access your medical records, if you are incapacitated.

Reference: Richmond Free Press (March 24, 2017) “Dying with debt: Advice from experts”