Dying with debt is a topic that makes most people feel uncomfortable. Residents of California and elsewhere typically work hard to keep a firm handle on their debt so that it does not become overwhelming. However, as you might imagine, people do die with unpaid debt. The Federal Reserve Board’s Survey of Consumer Finances reveals that households headed by senior citizens hold about $40,000 of debt. Further, the survey revealed that the number of seniors with debt is increasing.
What happens when these seniors die with unpaid debt? Do the children have to cover it? Does the spouse? Well, according to a news source, it depends. If a person with debt dies and does not have any assets, the debt will likely die with him or her. If assets do exist, the creditors will take their share during probate. Often this means there will be little or perhaps nothing left for the deceased’s survivors.
While children are not responsible for their parents’ debt, they will in essence pay for it because they will lose their inheritance to debtors. If the deceased has a mortgage, surviving children will have to take over payments if they wish to keep the home. Alternatively, they can sell the house to pay off debts.
What about the spouse of the deceased? What are his or her responsibilities? Since California is a community property state, the surviving spouse is responsible for debt accumulated during the marriage. Many senior citizens suddenly on their own cannot pay this debt and may have to sell their existing assets for well under the market value.
Death and debt is a complex topic for the ordinary person to grasp in full. The best way to get a handle on the subject and start taking proactive measures is to discuss the possibility of debt solutions with an estate planning attorney.
Source: U.S. News & World Report, “Will Your Heirs Have to Pay Up When You Die With Debt?,” Teresa Mears, June 02, 2016