Well, that sort of depends on what you're planning to write about them, Rose. I'm not an attorney, but have asked MY attorney about this very subject and he indicated that there are four issues that you need to be concerned with when dealing with real people in books:
A. Invasion of privacy;
B. Defamation/slander;
C. Copyright infringement; and
D. Unauthorized use of name and likeness.
Let’s first take the case in which you
accurately recount events that happened in the life of the person in question. In this case, first of all, you would not be invading privacy because, assuming the person is known to you and you depict events that are publicly known, then no privacy right attaches. If the person is not a public figure then you need to be a little more careful because they would still maintain some control over those aspects of their life and the events of their life that were not made public. Even if the person is dead, there could be a privacy claim, since there remains some commercial value in exploiting public awareness of the person’s name or likeness.
Secondly, if the matters that you recount are truthful, then there is little likelihood of exposure to a defamation claim because by definition a statement cannot be defamatory if it is true. The defamation claims may or may not expire on death of the real person.
Thirdly, with regard to infringement, you need to make sure that anything you write about the person is an original work of authorship and not copied from some other source.
Now, if you're writing imagined "what might have been" situations with a real person that you interacted with on a different subject -- DON'T DO IT! It's more pain than it's worth. There have been FAR too many lawsuits for a variety of things.
The same goes with famous people. For example, if you happened to have lived in Waco, Texas when the whole David Koresch thing was happening and you said hi in the cafe, but had no other interaction, it would be a very bad idea to include anything that didn't actually happen in the book -- even if the PERSON is real and you REALLY said hi.
At a minimum, you will want to have an attorney talk to you about the final product to see if there's anything in it that the other person might have a claim about.
Whether it becomes fiction by changing their names depends on your handling of it. You can make a disclaimer at the front like: names were changed to protect the guilty

D) or some such. I don't think it would change the classification of the novel. But when I inserted a totally fictional character into my real life account of a railroad race, it DID turn it from non-fiction to "historical fiction." No big deal to me either way. It was the publisher's choice to avoid their own issues with estates and historical societies and the like.
Does that help any?