According to a recent study, the average total household debt in America is just over $132,500, broken down as per the chart below…
… and thanks to the Fed’s recent and ongoing rate increases, the repayment of said debt will become increasingly more difficult. So difficult, in fact, that most Americans will be saddled with a sizable chunk of it at the time of their death.
Actually, most already are.
According to December 2016 data from credit bureau Experian provided to credit.com, 73% of American consumers had outstanding debt when they were reported as dead. Those consumers carried an average total balance of $61,554, including mortgage debt. Without home loans, the average balance was $12,875.
As credit.com reports, the data is based on Experian’s FileOne database, which includes 220 million consumers. (There are about 242 million adults in the U.S., according to 2015 estimates from the Census Bureau.) To determine the average debt people have when they die, Experian looked at consumers who, as of October 2016, were not deceased, but then showed as deceased as of December 2016.
Among the 73% of consumers who had debt when they died, about 68% had credit card balances. The next most common kind of debt was mortgage debt (37%), followed by auto loans (25%), personal loans (12%) and student loans (6%).
The breakdown of unpaid balances was as follows: credit cards, $4,531; auto loans, $17,111; personal loans, $14,793; and student loans, $25,391. And, as a reminder, debt doesn’t just disappear when someone dies.
What happens to that debt when you die, aside from it continuing to accrue interest until someone remembers to inform the creditors?
“Debt belongs to the deceased person or that person’s estate,” said Darra L. Rayndon, an estate planning attorney with Clark Hill in Scottsdale, Arizona. If someone has enough assets to cover their debts, the creditors get paid, and beneficiaries receive whatever remains. But if there aren’t enough assets to satisfy debts, creditors lose out (they may get some, but not all, of what they’re owed). Family members do not then become responsible for the debt, as some people worry they might.
That’s the general idea, but things are not always that straightforward. The type of debt you have, where you live and the value of your estate significantly affects the complexity of the situation. For example, federal student loan debt is eligible for cancellation upon a borrower’s death, but private student loan companies tend not to offer the same benefit. They can go after the borrower’s estate for payment.
To be sure, things can get messy. If your only asset is a home other people live in, that asset must be used to satisfy debts, whether it’s the mortgage on that home or a lot of credit card debt, meaning the people who live there may have to take over the mortgage, or your family may need to sell the home in order to pay creditors. Accounts with co-signers or co-applicants can also result in the debt falling on someone else’s shoulders. Community property states, where spouses share ownership of property, also handle debts acquired during a marriage a little differently.
“It’s one thing if the beneficiaries are relatives that don’t need your money, but if your beneficiaries are a surviving spouse, minor children — people like that who depend on you for their welfare, then life insurance is a great way to provide additional money in the estate to pay debts,” Rayndon said.
The best option, of course, is just to pay it all off while one is alive, however in a nation with over $15 trillion in household debt, that is increasingly unlikely. And, if the Fed normalizes rates as it promises, which for some odd reason means interest on savings accounts doesn’t budge even as the interest due on debt ticks up with ever move of the Fed Funds rate, it means that the only possible debt discharge for tens of millions of Americans, will increasingly be the most terminal one too.
It remains unclear if debt incurred in this life carries over into the next one.
