When a parent passes, it’s often thought that they will leave money and assets to their children. Sometimes, proper estate planning can help make that happen. But the question still remains on the other side of the spectrum… can you inherit debt?
Whether or not you can inherit debt is certainly question worth pondering.
A 2012 report for the National Bureau of Economic Research showed that about half of seniors die owning under $10,000 in financial assets. The percentage of households headed by someone 65 years of age or older was 60 percent in 2016, up from 41.6 percent in 1992, according to the Survey of Consumer Finances.
If you have an aging parent, these stats are likely the last things you want to hear. You may also be currently caring for them, and this reality may be all too real — and scary — for you. And when a parent passes, you probably don’t want to get the news that they were in debt. You may be planning services and, of course, grieving.
But you may wonder: Do I inherit this debt? Generally, the answer is no. That’s the good news. The bad news is that there are a few caveats, and it can be a headache. It can ease the burden and aggravation if you understand the process and have a game plan.
Learn the Lingo
You’ll want to be aware of two types of debt during this process.
Secured debts are ones with assets attached to them, such as a mortgage on a house or car loan. It’s usually possible to sell or return the good pay off the debt.
Unsecured debt doesn’t have an asset attached to it. It’s simply money that must be repaid, and the credit card ultimately has to eat the loss.
Typically, you are not responsible for taking on these debts. However, it may cut into your inheritance if estate funds must be used to settle the debt.
What Happens If the Estate Cannot Pay?
When it’s time to administer estate funds, the executor and lawyer will list outstanding bills to pay and debts to settle. Then, they’ll go about transferring funds. Fees and debts to cover include:
- Estate fees, like the attorney fee, and taxes
- Funeral and burial costs
- Dependent allowances to family members who relied on the deceased person for living expenses, such as a small child or spouse
- Federal taxes
- Outstanding property taxes and medical bills
- Secured debts
- Unsecured debts
But an estate gets classified as “insolvent” if it is unable to repay debts. Typically, the debt is written off. However, in the case of secured debts the creditor can take hold of the asset.
In other words, if you were hoping to keep the family home, you may not be able to if their estate couldn’t pay off the mortgage, and you won’t be able to, either. But, while you may not inherit the house, you won’t take on the mortgage.
Summarizing the above in more simplistic terms – while you won’t inherit debt from your parents, you may also lose out on inheriting and assets (like a house) or any money if it is needed to settle up on the debt that they owe to banks or government entities.
A Couple of Caveats
Sometimes, you will be responsible for repaying your parent’s debt. If the two of you have a joint credit card that your parent typically paid, creditors can hold you responsible for the unsecured debt. This responsibility holds true even if all of the money owed is from purchases your parent made. If you co-signed a loan, such as a mortgage or a car, you would also inherit that debt.
Finally, unpaid medical bills get dicey, and state laws vary. More than half of U.S. states, including Arkansas, Alaska, New Jersey, Rhode Island, and West Virginia, have what’s known as “filial responsibility” laws, which require children to repay medical debts. The state may not always follow through with these laws, but it’s a possibility.
How to Handle Your Parent’s Debt
Having a frank discussion about estate planning and finances with your parent before they pass is ideal. But that doesn’t always happen.
Though children are generally not responsible for repaying their parents’ unsecured debts, debtors may still come calling. Unfortunately, the process to get them to stop can be long, and you’ll need help. But the right strategy and team can help you navigate the stressful situation.
Consult a Lawyer
The estate’s executor is often a family member without legal experience. They are responsible for following state laws regarding how fees and debts get paid. But since they may not understand the inner workings of estate law and debt, having a lawyer is helpful when trying to understand if you can inherit debt from your parents.
The attorney can walk you through how to deal with debt collectors. Some steps they may take with you include:
- Requesting verification of a debt in writing
- Sending a letter to collectors explaining that your parent has passed and their estate is insolvent
- Informing the collectors that you are not responsible for paying the debt
After your lawyer informs the collector of these facts, the calls from collections should stop. Legally, they can only continue to contact you to let them know the case is closed, and they have chosen to swallow the debt. They may also contact you to tell you about legal action they are pursuing to settle the debt, such as a lawsuit. Your lawyer will help you handle the latter, and you should inform them of both communications for record-keeping purposes.
Leave a Paper Trail
If the collector pursues legal action, you’ll want to have proof of communications you’ve had with them and your attorneys. You’ll also want paperwork regarding the debt, including how much was owed and proof the loans and unpaid bills are in your deceased parent’s name.
There will likely be a considerable amount of paperwork and notes to keep, but it’s important to have this information on hand in case you need to build the case that you are not responsible for the debt. Consider keeping this information in a designated folder so you can access it as needed.
Keep Your Guard Up
Debt collectors have a job to do — get paid. But if you’re not responsible for paying it, you don’t need to fork over money just to get them to go away. They may try to tell you that you are obligated to pay it, legally or even ethically, but neither is true.
The fact that the aftermath of the death of a parent is an emotional time complicates matters. You may be tempted to just pay the debt, particularly if you are financially able to do so. The constant calls from collectors can become a constant and painful reminder of your loss. Mitigate these issues by directing correspondence to your lawyer and letting them handle it. Ask them to get as much in writing as possible to add to your paper trail — just in case.
So, Can You Inherit Debt?
Of course, nothing is as simple as “yes” or “no” in the world of courts and laws, but if you want the simple answer to the question of inheriting debt, the simple answer is “no”.
You might lose out on potential inheritance from your parents if it is needed to repay any debt in their name when they pass, but ultimately none of their debt should fall onto your shoulders.
That said, debt collectors can be vicious and start coming after you, so be sure to work with the above tips, like contacting a lawyer, to be sure you are safe and secure from inheriting debt.