Dying with Debt: The Hidden Financial Crisis
Life + Money

Dying with Debt: The Hidden Financial Crisis


If you’re counting on an inheritance, you might think again. Recent data show that more older adults today are in debt than before. A study earlier this year from the Employee Benefit Research Institute found that the percentage of households with credit card debt headed by someone age 75 or older doubled from11 percent in 1998 to 22 percent in 2010. And a 2011 University of Michigan Law School study found that those 65 and older are the fastest-growing segment of the U.S. population filing for bankruptcy and they carry 50 percent more credit card debt than younger debtors.

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In addition to credit card debt, today’s older Americans carry loans that were rare in the past for their age group. Fourth-quarter 2012 data from the Federal Reserve Bank of New York show that 2.2 million adults age 60 and older have student loan debt—with one in eight delinquent on payments. And since 1989, the proportion of those older than age 75 with mortgage debt has quadrupled.

Many seniors are racking up debt because of high medical bills and dwindling retirement savings, thinking that it will be forgiven when they die. While most debt cannot be transferred to their children, creditors can go after a senior’s home, their savings, and sometimes their families, who might have unknowingly cosigned a loan or who pay simply because they’re unsure who is responsible.

Children also can get bitten by a parent’s back taxes. If a deceased parent gifted money to a child, and that gift occurred after the IRS informed the parent that they owed the government, the IRS can reach into the child’s bank account, says California estate planning attorney Mark Powell. Some parents will try to gift their children money or assets to avoid creditors, but if the child takes it knowing that the parent did so to circumvent those seeking repayment, courts can order it seized once the parent is gone, Powell says.

In New York, for example, transfers to a child or another person that are made as early as 6 years before a debtor defaults on money they owe (including because the debtor dies) can be subject to seizure to repay the debt, he says. In other states, the “look-back” period is four or five years.

Other mistakes are more basic: if a child co-signs a loan—helping a parent refinance into a better mortgage rate, for example—they’re liable for the entire amount if their parent dies, says Ted Beck, president and CEO of the National Endowment for Financial Education (NEFE).

Declining health is a major driver of older adults’ straitened finances. Out-of-pocket health care costs in the 5 years before death average almost $39,000 for individuals and more than $51,000 for couples in which one spouse dies, according to a study this year in the Journal of General Internal Medicine. For one in four of the participants, those costs outstripped the value of their total household assets.

New York City elder law and estate planning attorney Ann-Margaret Carrozza also says long-term care costs not covered by health insurance, such as for nursing home care, are the single-biggest financial problem for her clients 65 and older. And a survey released June 3 by the NEFE found that among older adults with cognitive decline, 47 percent pay bills late or not at all, 36 percent have trouble calculating simple math problems, 35 percent have made irrational purchases, and 21 percent have depleted their savings accounts.

Carrozza says she’s seeing a growing number of cases in her practice of nursing homes coming after children for outstanding debts owed by deceased parents. She says it happens because during the admission process, children unwittingly sign a third-party guarantee to pay their mother or father’s outstanding debts when they’re gone. Failing that, debt owed to a nursing home by someone who dies gets absorbed by the institution. And most homes are operating on slim margins, says Greg Crist of the American Health Care Association, which represents the nursing home industry.

Federal law prohibits creditors from discriminating against prospective borrowers based on age. A 70-year-old can take out a 30-year mortgage loan just like everyone else if she qualifies, says Nessa Feddis of the American Bankers Association —banks also aren’t allowed to give extra scrutiny to a borrower’s qualifications based on age. But she says creditors themselves haven’t yet appeared to be affected by the growing ranks of indebted seniors.

Children can take preventive steps to avoid surprises at a parent’s death. When they sense a parent is in financial trouble, they should work with the parent to develop a plan for one of the children to help in overseeing their finances, says Beck. “Too many children don’t know their parents’ financial situation,” says Powell. “They don’t realize that every year when the parent writes them a check at Christmas time, that shouldn’t be happening.”

Powell recounts a recent case of an older client who was paying for her grandchildren’s college tuitions by withdrawing equity from her house. Her children could have afforded to pay for their own children’s school costs and were shocked to discover that their mother had drawn down 40 percent of her equity to keep up the school payments.

Robert Stammers of the CFA Institute also advises children to consider hiring the same financial advisor or accountant as the parent—the professional then can serve as an objective outsider who also knows the complete picture. And Kevin Gallegos of Freedom Financial Network says that for cases of serious debt, children should consider working with a credit counseling agency or a company that provides debt settlement services—the latter can often get clients savings of up to 50 percent of the total debt, he says. (The Federal Trade Commission offers advice in selecting among these services.)

Those can both help children protect themselves and avoid what may be worse—money-related family arguments that often arise when parents get into financial trouble. “The number of people I know who are feuding with siblings over how [money decisions] are being managed with mom and dad is just incredible,” says Beck. “This is the little family secret that everybody’s dealing with.”