Most Americans Die With Debt: Here’s How to Deal With It

Families don’t generally sit around the dinner table and chat about money. So when a loved one dies, it’s not uncommon to realize you knew nothing about their finances. You may discover they left behind thousands of dollars of debt. You may also freak out about what that means for you.

It happens a lot, actually: 73% of recently deceased consumers had debt when they died, according to December 2016 data from Experian. Their average debt load was $12,875, excluding mortgages. (When you add home loans, people died with $61,554 of debt, on average.) By far, people most often died with credit card debt (about 68% of deceased consumers had balances on their credit cards). After that, it was mortgages (about 37% of deceased consumers), auto loans (25%), personal installment loans (12%) and student loans (6%).

A quick explainer on that Experian data: It’s based on the credit bureau’s FileOne database of 220 million consumers. While those consumers don’t represent every single American (there are nearly 248 million adults in the U.S., according to 2015 estimates from the Census Bureau), the 73% of consumers who died with debt includes tens of millions of people whose families may be affected by what they were unable to pay.

What Happens to That Debt After Death?

Generally speaking, a person’s estate is responsible for their debt. Heirs aren’t usually liable for it, but if you expected to receive some money or property from the deceased, you may end up losing out on some or all of that inheritance, because creditors must get paid before you do.

The process for dealing with a deceased person’s debt depends on several factors, including the person’s state of residence, the kind of debt they have and the value of their estate.

“The first thing that is important to know is the debt belongs to the deceased person,” said Darra L. Rayndon, an estate planning attorney with Clark Hill PLC in Scottsdale, Arizona. “What that means is if someone dies and they’ve got $100,000 worth of debt and zero assets, no one has to take over that debt. It belongs to the estate, and because that person is deceased, that kind of ends it all.”

But if the estate contains property or other assets, the person’s creditors must get paid before their beneficiaries. That may seem straightforward, and sometimes, it is, but it can quickly become complicated. Rayndon gave an example:

“If my mother dies and leaves me a house worth $200,000 and it has $125,000 of debt on it, I’ve got to figure out a way to pay the mortgage on that property,” she said. So you either keep the house and pay the mortgage, or you sell it and use the proceeds to satisfy the debt.

But say your mother also had $10,000 of credit card debt and a $20,000 personal loan, and the home was her only asset. That leaves you needing to sell the home, and you’ll only get what’s left after the administrative costs of executing her estate and her creditors have been paid. That may not be as much as you — or your mom — thought you’d get. If you were financially dependent on your mom, that can be quite the financial hit.

“If for some reason the estate is not solvent — like $300,000 worth of debt and $200,000 worth of assets — then the creditors get paid proportionally based on what’s available in the estate and no beneficiary gets anything,” Rayndon said.

Other Things to Know About Debt & Death

If you’re married and live in a community property state, you may be responsible for debt your spouse acquired during your marriage, even if it was only in their name. And as far as debt collection goes, just because there’s not enough in an estate to pay creditors doesn’t mean they’re not going to try to get paid.

It’s not unheard of for creditors to try preying on emotional family members to get payment, said Mike Sena, a certified financial planner in Roswell, Georgia. Family members may want to pay a creditor because they feel like they should or they want the creditor to leave them alone.

“They will use that,” Sena said. “Their job is to collect an outstanding debt, but if the estate has no money, it has no money. … It is not the obligation of family members to pay off a deceased person’s debt.”

One more thing: Federal student loans are eligible for cancellation after a borrower dies. That’s generally not the case with private student loans, though. Like other debts, private student loans become due in full upon the borrower’s death, and the estate is responsible for covering the unpaid balance.

Estate Planning 101: How to Avoid Burdening Your Family

Perhaps you’re thinking this sounds like a huge headache for the families of deceased debtors — that’s because it can be. It’s especially stressful if your estate plan isn’t clear (or if you don’t have one), because then the court may have to decide who gets what (again, processes vary by state). That can add to the administrative costs of executing an estate, which reduces the amount of money left for creditors and, finally, beneficiaries.

“Estate planning is not really for you, the individual; it’s for those you leave behind,” Sena said. He acknowledged it’s a topic a lot of people don’t want to deal with, adding that about a quarter of the people he talks to don’t want to address it. “I just think it’s a personal responsibility. People need to prepare for their own death.”

How to do that? Plan well, and review your plan often.

And as far as worrying about your debt after death, there’s a lot you can do now, like living below your means and minimizing the amount of debt you take on. If you stay on top of your finances now, chances are your family will have an easier time sorting through them when you’re gone. One way to keep your fingers on the pulse of your financial health is to regularly check your credit. You can get a free credit report summary on Credit.com. It includes a free credit score and a personalized action plan for improving your credit. (If improving your credit is a big priority for you, you may want to read this guide on how to improve your credit score without going into debt.)

How to Get Started With Estate Planning

It starts with a document you’ve probably heard about: a will.

“Everyone over the age of 18 should have essential documents, including a will, financial and medical powers of attorney and a living will (also known as an advance medical directive),” said Jennifer E. Myers, a certified financial planner with SageVest Wealth Management in McLean, Virginia.

Most people know they should have a will, but knowing you should have one and knowing how to make one are very different things.

“Unfortunately it’s a lot of paperwork — I think most people are best off meeting with an attorney,” said Dana Anspach, a certified financial planner and founder of Sensible Money in Scottsdale, Arizona. There are also online services out there, and they’re better than nothing, Anspach said, but an attorney is still preferable.

In addition to going to a lawyer to set up those essential documents, it’s crucial to maintain current information in your financial accounts. Review your beneficiaries periodically, especially after a life event like a marriage, divorce, birth or death.

“We’ve seen cases where people still had ex-spouses listed, and it’s a mess,” Anspach said. “They think their will and their trust takes care of it, but it doesn’t. These beneficiaries supercede what’s in their trust.”

How Important Is It to Have an Estate Plan?

Planning for your death may feel morbid, but you have to face reality: You don’t know what’s going to happen tomorrow.

“A lot of people don’t realize that if they die without a will or [with] any assets at all, the state will dictate and determine who gets what at that point, and that may be very different than what your desires are,” said James M. Matthews, a certified financial planner and managing director of Blueprint, a financial planning firm in Charlotte, North Carolina. “I think that’s why there’s a tendency to assume that only people who are wealthy or only people who are old need an estate plan.”

Chances are you have a preference as to what happens to your things after you’re gone, no matter how little you have. Put another way: “If you have a cat and a plant, you need a will,” Rayndon said.

Start by talking to a loved one — whether that’s your spouse, sister or closest friend — and figure out what’s important to you. Then, take the steps to make your preferences legally binding.

“It’s not the most glamorous event you’re going to take on for the year,” Myers said, “but it could be the most important to you and your family.”

Estate planning involves more than just a will. You can find a longer list of documents you should fill out before you die. And, if you have any questions about paying down debt or otherwise getting your finances in order, leave it in the comments section below and one of our experts will try to help.