Grandma and Gramps are
not doing well. In fact, the state of finances for the elderly is a shambles.
Let's start with falling home prices. The AARP found that between 2007
and 2011, "3.5 million loans held by people age 50 or older were
underwater, 600,000 were in foreclosure, and another 625,000 were 90 or
more days delinquent." And that doesn't include the 1.5 million seniors
who lost their homes during that period.
Surprisingly, another source of distress for seniors is student
loans. A shocking 2.2 million Americans age 60 or older have student
loan debt, with an average balance of $19,521, according to data from
the Federal Reserve Bank of New York.
When the going got tough, Grandma and Grandpa did what those of any age
do -- turned to credit cards. But in their case, credit card debt has
been a major factor in driving them to declare bankruptcy. Between 1991
and 2007, the number of people ages 65 to 74 seeking bankruptcy rose 178
percent. Even worse, among those 75 and older, the number seeking
bankruptcy was up 567 percent!
In a paper analyzing the data from a Consumer Bankruptcy Project, law
professor John Pottow writes that "the median elder debtor in bankruptcy
carries fifty percent more credit card debt than the median younger
filer."
And to top it all off, these folks have little to no savings: Two-thirds
of those age 75 or older have absolutely nothing money left in their
retirement accounts, and have little hope of finding a decent job to
help them make ends meet.
So What Happens When Grandma's Gone?
While those elderly individuals who do file for bankruptcy won't leave
behind massive debts, those who remain committed to paying down their
bills -- but die before they successfully do so -- can place a burden on
their heirs.
Luckily, most kinds of debt cannot legally be transferred to a deceased
person's heirs. But that doesn't mean you're entirely immune to
Grandma's bills.
Let's take a look at what happens to the major kinds of debt when an elderly relative passes on.
1. Mortgage. A mortgage is a secured loan: Simply put,
there is collateral (the property) that guarantees the balance. As such,
mortgages are not forgiven when a borrower passes away. They passes on
to the deceased's estate. If the estate has enough cash to cover the
remaining mortgage balance, it can be used to pay off the loan and the
heirs can take ownership of the house. Or, you can assume the mortgage,
i.e., put it in your name or
leave it in the original owner's name,
but continue to pay it normally. Or you can refinance. And of course,
there's always the option of selling the house to repay the remaining
balance of the loan.
But if the mortgage is upside down, you're not stuck; there are ways to
walk away from a bad mortgage left to you by a relative.
2. Car loan. Car loans, too, are a form of secured
debt. As such, an heir can, with consent of the lender, assume a car
loan, or refinance it. Otherwise, you'll either need to use the estate's
cash to pay off the car loan so the heirs can take ownership of the
vehicle, or the car will need to be sold to repay the remainder of the
debt.
3. Personal loan. Although theses debts are usually
unsecured -- i.e., there was no collateral put up against the loan --
they do still pass on to the estate. The executor's primary
responsibility is to use the estate's assets to satisfy the deceased's
remaining debts. If the assets cannot completely cover all the remaining
debts, the executor usually divides up the money, and pays each debtor
an equal percentage of what they are owed.
4. Student loan. Federally insured student loans are
forgiven upon death. No repayment by heirs is necessary -- simply
contact the lender or loan servicer and send them a copy of the death
certificate (and possibly wait quite a bit for the paperwork to be
complete, with involving the government and all). Unfortunately, private
student loan debt is not forgiven and falls to the estate similar to
those other loans mentioned above.
5. Credit card. Like personal loans, if there are
enough assets remaining in the estate to cover the debt, it must be
applied to outstanding credit card debt. If there is no remaining money,
the credit card company usually writes off the debt.
Of Course, It's Not Always That Simple
If any of the debt was incurred with a cosigner, the burden of debt
typically falls entirely onto the other party who signed the loan.
What's more, different states treat debt differently. Certain states are
community property states; in these, any assets accumulated during the
duration of a marriage are considered joint assets and, in some cases,
so are debts -- regardless of whether both parties signed the loan.
Meaning if your estranged -- but not officially divorced -- spouse has
an outstanding loan from the time you were married, it could still fall
back onto you, regardless of your current relationship with them.
Also, not all of a deceased person's assets become part of the estate.
IRAs, 401(k)s, brokerage accounts -- even life insurance payouts -- all
pass through, untouched, to the designated beneficiaries. These amounts,
therefore, are not taken into consideration when determining whether or
not an estate has enough funds to satisfy their debts.
So What Can and Should You Do?
First, if you are the child or grandchild of someone whose finances seem
to be in trouble, it's important that you discuss it with them. It's
not always easy, but being open, honest, and working together to craft a
plan now can save you countless hours of stress later -- and provide
your loved one with the assurance that when they pass on, they aren't
leaving you with an unpleasant burden.
Second, remind co-signers about any loans they are still listed on. It's
also important to go through and update beneficiaries on those accounts
that do directly pass through without becoming part of the estate.
Lastly, if you're over the age of 50, think twice about incurring new
debt. It should be a last resort, an emergency-only option -- both for
your own peace of mind as well as that of your loved ones.
Making the right financial decisions today makes a world of
difference in your golden years –- to both you and your loved ones. But
most people aren't prepared. Don't make the same mistakes as the masses.
Learn about The Shocking Can't-Miss Truth About Your Retirement in this special free report from The Motley Fool.
