Page 28 - Southern Exposure - February '25

Page 28, Southern Exposure

EldEr EstAtE PlAnninG

Handling A Loved One’s Debts After They Die

By Anné Desormier-Cartwright, J.D., Esq.

Americans are, quite Not All Debts Go Away At Death discharge, although it is not the norm. They may come
literally, getting buried Debts not inherited by a specific individual under the after the loan’s cosigner (if there is one) or the estate for
in debt, with nearly half exceptions described above do not just disappear, except repayment of the outstanding balance on the loan.
expecting to pass away for debts that are dischargeable by death. Secured Versus Unsecured Debt
with outstanding debts. 1 For example, federal student loans, including direct Determining how and when to pay a debt after the
Generally, a person’s subsidized loans, direct unsubsidized loans, direct consolidation debtor has passed away and who or what may owe the debt
debts do not go away loans, federal family education loans and federal Perkins loans, can depend on whether the debt is secured or unsecured.
when they die. Some types are usually discharged when the borrower dies, as long as the ● Secured debt is backed by collateral (a tangible
of debt, such as federal loan servicer receives proof of death. 8 asset the lender can repossess or sell if the borrower does
student loans, are typically Private student loans are a different story. Some lenders
forgiven upon the debtor’s of private (i.e., nonfederal) student loans offer a death Elder Estate Planning on page 29
death, but private loans and
cosigned accounts may still be owed after the debtor has
passed away. State laws also play a factor in the post-death
debt settlement process.
While nearly half of Americans think they will pass
on their debts when they die, you can take proactive
steps now to protect your loved ones from inheriting or
becoming responsible for your debts. If you are an estate’s
executor/personal representative or have been contacted
by a debt collector about a deceased family member’s
debt, you should understand your rights and obligations.
One Nation, Under Debt
Debt is as old as civilization itself. Lending at interest
can be traced back to ancient Mesopotamia and the use
of promissory notes to facilitate trade. The United States
has carried debt since its inception, borrowing money
from domestic investors and the French government to
fund the Revolutionary War. 2
Total consumer debt eclipsed $17 trillion in 2023, up
from $15 trillion in 2021, according to credit reporting
agency Experian. The largest and most common debts
3
include
● mortgages ($11.5 trillion in 2023),
● auto loans ($1.51 trillion),
● student loans ($1.47 trillion),
● credit cards ($1.07 trillion), and
● personal loans ($571 billion).
4
The total average individual debt balance in 2023
was $104,215, up from $101,915 in 2022 and $96,371 in
2021. 5
According to Debt.org, 73 percent of Americans die
owing money. The average amount of debt they die with
6
is nearly $62,000.
7
What Happens To Your Debt When You Die
You are probably familiar with the expression “buried
in debt.” It might hit close to home if you are like most
Americans struggling to pay off existing loan balances.
However, do you know what happens to your debt when
you die?
The answer depends on factors that include the type of
debt and the state where you live. In most cases and most
states, your loved ones are not stuck with your unpaid bills
because creditors are paid only from the assets (e.g., a
home, car, bank accounts, investment accounts) that are
(i) part of your probate estate and go through a probate
court or (ii) in your revocable living trust.
If you do not leave behind enough assets in your
probate estate and living trust to fully cover the debts
owed, creditors may have to settle for what is available.
There are some exceptions to the idea that surviving
family members and other heirs are not on the hook for
the debt, including
● a person who cosigns on a loan;
● the spouse of a deceased person who lives in a state with
community property laws (Arizona, California, Idaho,
Louisiana, Nevada, New Mexico, Texas, Washington, and
Wisconsin); and
● the spouse of a deceased person who lives in a state
that requires a surviving spouse to pay certain healthcare
expenses and other kinds of debt.
The rules governing when a surviving spouse is
responsible for paying unpaid medical bills are complex
and vary by state. It is important to work with an
experienced estate or trust administration attorney to
ensure that your affairs are wound up correctly.
Surviving spouses and adult children are frequently
contacted by debt collectors attempting to collect on bills
for the medical care of their deceased loved one, according
to the Consumer Financial Protection Bureau. However,
unless the survivor also agrees to the medical debt or is
responsible under state law, they are generally not liable
for the debt.