According to a study conducted by Credit.com last year, a surprising 73 percent of Americans die in debt, leaving behind a mean-average balance of $61,500. The most common form of debt was credit-card debt (68 percent), followed by mortgage debt (37%) and then others. Given how frequently Americans die with debt, what are the consequences and how can talking with a New York bankruptcy lawyer provide better alternatives?
Before answering those questions, I’ll clarify the study’s findings. Researchers sampled data from the credit-reporting agency Experian, comparing consumers who had debts in October 2016 to those from that same group who had died by December 2016. Although a majority of debtors carried credit-card debts, the average balance was about $4,500. Auto loans (25 percent) went up to $17,000, but student loans (6%) ran as high as $25,000. Oddly, the average amount of mortgage debt wasn’t listed. Additionally, the typical age of these debtors wasn’t given either, which would’ve been more useful than simply giving numbers for everyone who died in just one month.
Still, it’s pretty clear that the types of debts with larger mean-average balances tend to be less common among Americans who pass away. This is a good thing.
So what are the consequences of dying with debt? Generally, the property of a person who dies (a “decedent” in law) goes through probate, which is similar to bankruptcy but operates in state court, not federal court. The decedent’s assets are placed into an estate, then they’re sold off as necessary to repay the creditors. Anything leftover goes to the decedent’s heirs or beneficiaries if there’s an estate plan. Thus, debts interfere with a decedent’s ability to transmit assets to his or her heirs.
That fact might not bother some debtors (and even their heirs). Others might be very upset by it.
Additionally, some debts might transfer to spouses on death, if they’re co-signed. Others might be extinguished on death, such as most federal student loans. (Private student loans to persist like other debts, even if it leads to grieving parents paying for their kids’ co-signed debts.)
So what role can bankruptcy play in preventing people from dying with debt? For Americans who have the opportunity to plan their estates, bankruptcy can actually help. In particular, bankruptcy exempts some types of assets from the bankruptcy estate that probate would not, particularly home equity. Social Security and disability payments are also protected in bankruptcy. Debtors who wish to leave more money for their children when they die can consider discharging the debts they have while keeping assets that would otherwise go to creditors in probate.
An alternative to bankruptcy, for retired debtors at least, is paying down debt before or during retirement. The nemesis here is lower incomes and interest charges. Interest is like a negative investment return, so it prevents wealth from accumulating via compound interest. Debtors who save more money earlier—and paying debts is technically saving—will have more money later.
A report on the Credit.com survey is here.
Of course, dying with debt is not a humiliation, and bankruptcy won’t always protect people’s assets to allow them to live the lifestyle they want afterwards. However, for some people dying debt-free is important, as is leaving as much as possible for the next generation. If you are retired, or approaching retirement, but you owe substantial debts, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.