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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.

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sherriemiranda1

Wait a minute! They made a law many years ago (the 50s maybe) that said living heirs do NOT have to pay their parents' debts. And we had 2 debts dismissed just by saying 1) My mother-in-law passed away and 2) My mother passed away. There were no questions asked. They didn't even ask the date that they died.
Someone is scamming people here to try to get us to pay their parents debt. Do NOT fall for this!

June 27 2013 at 6:00 PM Report abuse rate up rate down Reply
Scottilla

Excuse me, but if someone dies without any assets, what kind of inheritance were you expecting?

June 27 2013 at 9:32 AM Report abuse rate up rate down Reply
chevyle 33

a men

June 26 2013 at 8:24 PM Report abuse rate up rate down Reply
chevyle 33

dose not work hello

June 26 2013 at 8:23 PM Report abuse +1 rate up rate down Reply
M

Not completely on topic, but things can always be worse...

IF your loved one wants to be cremated, VERIFY they have the proper forms filled out, notarized with witness(es), and filed with their atty. (A copy for the executor named in the will, and a copy of the will too, in the posession of the executor is a good idea too!).

Mom-in-law had her husband die first, then her brother, then her daughter, then her niece.
She **thought** she had ALL the paperwork done, but her atty dropped the ball, not noticing that one form wasn't completed. The family situation left only her niece's children, a minor grand-niece and minor grand-nephew, who both lived overseas, and barely had ANY English! Her body was "stuck" until her blood family could/would sign the appropriate paperwork, in "lawyer English" no less.

In spite of premium fees, the funeral home essentially gave up after a month, and called saying they would have to turn over her body to the medical examiner (to resolve their involvement)! Additional fees for "storage" would not be acceptable.
They conveniently 'forgot" they agreed to handle the cremation, and the required paperwork...(and the two minors had to provide acceptable proof of blood relation to have their status accepted.)
BTW, there was NEVER any question of her intentions, or her death due to old age.

All told, her husband had been cremated, her dog had been cremated, her daughter had been cremated, and she wanted all the ashes mixed with hers, and 'dispersed'.
Her estate had money, but money didn't "fix" any of that mess...

June 26 2013 at 4:12 PM Report abuse rate up rate down Reply
mauimom

Good grief, can't you guys afford an editor?

" They passes on to the deceased's estate"

June 26 2013 at 2:19 AM Report abuse -1 rate up rate down Reply
mauimom

Typo, perhaps: "have absolutely nothing money left in their retirement accounts,"

June 26 2013 at 2:17 AM Report abuse rate up rate down Reply
anthony.fama@aol

If their lives aren't paid for by the time they die all you need to do is walk away. Tell you children also. Just say no we don't want any of it and don't forget we are talking about debt

June 26 2013 at 12:12 AM Report abuse +2 rate up rate down Reply
anthony.fama@aol

You just don't accept the inheritance you just bury them and walk away. Of course if they're in debt somebody will have to pay for the funeral or you can even walk away from that too. How cold are you

June 26 2013 at 12:04 AM Report abuse +1 rate up rate down Reply
1 reply to anthony.fama@aol's comment
M

Hmmmm, I suspect that "real estate" in the form of a burial plot would get entangled in the disposal of the estate debt as well.
I'm not a lawyer, but the debt collectors could/would possibly go after that asset... (unless it was COMPLETELY documented that the deceased had not paid for it in some way... although a life insurance policy payout to an heir could be *safe*)

June 26 2013 at 4:26 PM Report abuse rate up rate down Reply
jmswriter1

Education has immense value beyond whether or not it is applied to a job. The types that put down extra schooling, thinking it's a way to avoid the job market, are simply ignorant. The housing bubble and meltdown recession would never have occurred if honesty prevailed in all business conduct, with a moral code as its basis. Jobs would then be as plentiful as they were decades ago, when the buck wasn't passed to anonymous lenders in banking and Wall St.

June 25 2013 at 11:39 PM Report abuse -1 rate up rate down Reply