What to do when a relative dies and leaves a ton of debt?
We have all heard the only two things guaranteed in life; Death and taxes. Well, maybe we can add Debt to that list; Debt, Death and Taxes or DDT for short? “DDT, is it really that bad?” you ask. Can be.
Did you know that most people who move to a better place leave behind debt? It is true. What is that old adage; “You can’t take it with you!” That makes sense, right? You can’t take your assets and therefore you can’t take your debts either. So what about all this debt left here on Earth? Well, that turns out to be a very interesting topic. So let’s discuss this, okay?
How often do people with substantial debt die?
Nearly 75% of Americans who die today leave behind debt. The average amount owed, not including mortgage loans, is nearly $13,000. If we were to include mortgages, the debt owed would be about $61,500. Nearly 70% of Americans who died in 2018 had credit card debt. Auto loans were owed by 25% of the deceased. It turns out that 6% owed money on student loans, a number that increases each year according to Experian and credit.com.
Do these statistics surprise you? You should not. The average person has literally no savings, a car loan, and about $10,000 in credit card debt. Most people don’t even own their smartphone, instead they pay monthly on top of their cell service bill. If this is you, you are in the majority and are still considered middle class. You shouldn’t be surprised when a loved one passes away and you discover that they were in the same boat you are in now.
Who is responsible for all this debt when someone dies?
Do not worry, the heirs are not usually the ones who now owe the debt. The estate of the deceased person is now responsible for the debt. However, this could very well affect your inheritance since creditors get paid first. There are rules for settling an estate and rules that determine how much is owed on debts against that estate. Much of this depends on the status the decedent claimed as his residence, the total value of the estate, and the types of debts still outstanding.
If a person dies owing more than their assets, an heir can ‘decline to accept’ their inheritance and therefore will not receive any money, but will also not be liable for any of the debts. On the other hand, if someone dies and has more assets than liabilities, then it may be necessary to sell some of those assets to pay off the debt. In this case, the heirs will get the difference (less the administrative costs to execute the inheritance and the taxes owed).
It goes without saying that it makes sense to have a will and plan before you die. Of course, that’s not always how things work out, as no one really knows when or, in many cases, how they will die.
What happens if your spouse dies? Do you owe your debts?
Well, in the case of a surviving spouse, it becomes a completely different situation. Again, it does matter where you live, for example a ‘community property’ status. In such cases, you could be liable for the debt even if it was only in your spouse’s name, and ‘if’ the debt was assumed during the marriage.
Creditors will often lean a bit more heavily on surviving family members to try to get paid. Creditors may also hire a collection agency to try to collect the debt. It can be a problem when you are already in an emotional state, as they try to get you to commit to paying the debt owed, even if you are not responsible.
If you feel pressured to pay a debt you don’t think you owe, you need to seek the help of an attorney who knows the law and can help explain your rights. There are law firms out there to help.