What Happens To Your Debt After You Die?
Dear Rich Lifer,
By the latest numbers from credit bureau Experian, consumer debt in the US hit an all-time high of $14.3 trillion back in March, with the average American owing $90,460.
Perhaps most concerning is that Baby boomers are the only other group, along with Generation X, to have more debt than the national average – owing $96,984.
Americans in this age group hold the highest personal loan debt, with an average of $19,253 in personal loan balances.
They also carry the second-highest average balance across numerous types of debt, including HELOCs, student loans, auto loans and credit cards.
We looked at how much debt the average American carries by age group, here’s what we found:
- Gen Z (ages 18 to 23): $9,593
- Millennials (ages 24 to 39): $78,396
- Gen X (ages 40 to 55): $135,841
- Baby boomers (ages 56 to 74): $96,984
- Silent generation (ages 75 and above): $40,925
According to Experian, millennials have seen the largest increase in debt in the last five years: In 2015, the average millennial had about $49,722 in debt, and by 2019 they carried an average of $78,396 in total debt — an increase of 58%.
Debt has become the elephant in the room — both national and consumer. And while some debt is unavoidable, other debt should be mitigated or managed so you are not burdening yourself or your family.
A growing trend is more people are concerned about incurring debt after a loved one’s death. In the same vain, we have readers who want to know how their own debt will impact their family.
Today we’re unpacking debt after death.
Here are the basics…
When you die, your assets become your estate, and probate is the process of dividing up your assets. How long probate lasts and how long creditors have to make claims against your estate depends on where you live.
Typically, the process lasts three to nine months. But, it’s a good idea to get familiar with your state’s estate laws now, so you know what rules apply.
Beyond these basics, there are instances where debts are forgiven.
There are also instances where your family will be left on the hook for what you owe.
Here are five common debt scenarios you should prepare for:
1. Beneficiary Money Is Protected, IF…
Unsecured creditors typically can’t collect any money on accounts that have been properly named for beneficiaries. If you or your loved one have completed a beneficiary form for each account — like your life insurance policy and 401(k) — then that money should be protected.
If you haven’t determined before death where those funds will go, they’ll get rolled up into your estate, which creditors can go after.
Always make sure you have assigned beneficiaries to all your accounts.
2. Credit Card Debt Doesn’t Disappear
Unfortunately when you die, your credit card debt doesn’t die with you. Wouldn’t that be nice?
Usually, the remaining balance is charged to your estate assets. Your kids won’t typically inherit your credit card debt, unless they are a joint holder on the account.
If you are a surviving spouse and joint borrower, it’s a different story. (Note: this is different from being an authorized user.)
Also, if you live in a community property state, you could also be on the hook for your spouse’s credit card debt. Check your state laws at the Consumer Financial Protection Bureau for more info.
What happens if your estate has no value after you die? Assuming there are no joint borrowers, the credit card company loses, and they write off the debt.
Just make sure you avoid using the credit card following the death of a loved one, since that could be viewed as fraud. Contact all three major credit bureaus (TransUnion, Equifax, Eperian) and have them flag the account as “deceased.”
This will ensure no further charges are made on the card.
3. This Type Of Student Loan Is Forgiven…
Federal loans taken out by parents on behalf of their children and loans taken out by students themselves are all forgiven, if the borrower dies.
Proof of death is required, either the original death certificate or a certified copy will work. Private loans, however, are handled differently. There are no laws requiring lenders to cancel the loan.
Some lenders offer loan forgiveness at death, while others simply charge the debt back to the estate. Check with your lender so you know the terms of your loan.
4. The Death Pledge You Knowingly Signed
The word mortgage comes from the French mort for “death” and gage “pledge,” as in payable to death. Really it should mean payable after death.
Under federal law, if you leave a mortgage behind, lenders must allow family members to take over the mortgage when they inherit the property.
This law prevents heirs from having to qualify for the mortgage. To be clear, your kids are not required to keep the mortgage – they can refinance or pay off the debt entirely.
The same goes for a surviving spouse who is a joint borrower on the mortgage. Depending on your heirs’ circumstances, they may not be able to afford the payments. If there was a reverse mortgage on the property, or the mortgage owed is greater than the property value, these could all pose problems.
You might also have to navigate inheriting a property and mortgage with a sibling. If that’s the case, you should talk about equalizing the estate — one sibling inherits the house while the other keeps some other asset like the life insurance proceeds. Talk to a financial advisor and estate lawyer to figure out what’s fair.
Whatever you do, make sure you don’t wait too long since mortgage payments will still need to be paid every month.
5. Until Death Do Us Part
The last thing to be aware of is how your marriage affects your debt after death. If your spouse passes away, you are legally required to pay any joint tax owed to the state and federal government.
If you live in a community property state, you — the surviving spouse — are responsible for paying off any debt your partner racked up while you were married. That includes credit card debt, even on cards you might not have known existed.
There are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
But other states may also leave you on the hook for certain debts, like medical bills. The point is, if you are married you need to openly communicate with your partner about what debt you owe, so either one of you is not left with a surprise.
In a perfect world, none of us would have debt or pass on the debt we owe to our spouse or children. But, debt has become the American way, especially during times of economic uncertainty.
Do your loved ones a favor by organizing your debt so that when you go, it’s all taken care of. This is arguably the best gift you can leave.
To a richer life,
The Rich Life Roadmap Team