What happens when someone dies still owing a substantial amount of money? It's a really important question -- and a lot of us wrongly assume we know the answer.
Unfortunately, not knowing what happens to debt after death has left a lot of people in jeopardy of losing substantial amounts of money to scam artists. Far too often, an obituary in the newspaper results in unlawful efforts to collect the deceased person's debts from their surviving relatives. Except in very unusual circumstances, a deceased person's debts are resolved through the probate process and their relatives are not responsible for them.
Don't debts just die with the person who owed them?
It's more accurate to say that debts belong to the deceased person's estate. During the probate process, the entire estate is valued, qualifying debts are paid off, and then any remaining assets are distributed to the beneficiaries of the estate. If there's not enough money in the estate to pay all of the debts, the remaining balance owed is erased. Fortunately for the beneficiaries, that means they owe nothing. Unfortunately, it also means there is nothing left to inherit.
Moreover, probate is governed by state law -- which varies from state to state -- and some types of debt get handled differently from others. For example, federally guaranteed student loans are forgiven at the time of the borrower's death (at least for now). Private student loan lenders are likely to seek to collect from the estate. Taxes, child support and alimony are tougher than other debts to get forgiven.
What kinds of debt do the average American die owing?
According to Experian's FileOne database, about 73 percent of Americans who died in 2015 owed money. About 68 percent of them owed money on a credit card. Around 37 percent owed a balance on their mortgage and 25 percent had car loans. Surprisingly, about 12 percent owed a personal loan to someone. Six percent had student loan balances.
Here's the average owed in each category:
- Credit cards: $4,531
- Mortgages: $48,679
- Auto loans: $17,111
- Personal loans: $14,793
- Student loans: $25,391
What should you do if you don't want to leave debt and debt-collection hassles to your loved ones? Set up a comprehensive estate plan with an attorney. The right combination of a will, trusts and other planning documents can help you plan ahead to ensure your family doesn't have to worry.