Inheriting debt from parents is a stressful situation many families face. While you aren’t automatically responsible for your parents’ debts, there are some cases where you may have to pay Let’s take a look at how parental debt works after death and how to protect yourself
How Debt is Handled When a Parent Dies
When your parent passes away, their debts typically do not become your responsibility. Instead, the debts are paid by their estate before any assets are distributed to beneficiaries
The executor handles paying off debts during probate. They use the deceased’s assets first, which may include things like:
- Bank accounts
- Investment accounts
- Real estate
- Cars
- Other valuables
If there isn’t enough money in the estate to pay all debts, the creditors may forgive the remaining balances. The executor will notify creditors of the death and make claims against the estate within a limited timeframe.
##Exceptions: Debt You Could Inherit from Parents
While you usually don’t inherit debt from parents, there are a few exceptions:
Co-Signed Loans
If you co-signed any loans with your parent, like a mortgage, auto loan, or private student loan, you are equally responsible for repayment. The loan does not go away if your parent dies.
Filial Responsibility Laws
Some states have filial responsibility laws that require adult children to pay their deceased parent’s medical bills if the estate does not have enough assets. This could leave you with uninsured medical debts.
Community Property States
In the nine community property states, a surviving spouse may have to pay debts their deceased spouse incurred during the marriage:
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
This is because assets and debts acquired during the marriage are considered jointly owned.
Protecting Yourself from Parental Debts
While no one wants to think about their parents passing away, being prepared can help you avoid getting stuck with unexpected debts. Here are some tips:
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Understand co-signed loans – Be aware of any loans you’ve co-signed with your parents and have a plan to take over payments if needed.
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Check if you live in a filial responsibility state – Make sure you understand the laws in your state regarding medical debt inheritance.
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Ask about debts – Have an open conversation with your parents about any outstanding debts and their plans for repayment.
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Encourage estate planning – Help your parents create a will and powers of attorney to make debt repayment and asset distribution easier.
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Evaluate insurance needs – Be sure your parents have adequate life insurance and long-term care insurance to cover final expenses and avoid burdensome medical debt.
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Learn about trusts – Assets placed in a living trust may avoid probate and be protected from creditors after death.
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Consult an attorney – Talk to an estate planning or elder law attorney if you have concerns about inheriting debt. They can provide guidance for your unique situation.
While losing a parent is difficult enough, being saddled with unanticipated debt can make the situation even harder. Taking proactive steps can help you avoid surprises and gain peace of mind. With the right preparation, you can limit the debts you inherit and properly manage those you are responsible for.
What kind of debt can be inherited?
In general, you do not inherit your parents debts. However, there are a few exceptions:
- You took out a loan with your parents as a co-signer.
- You and your parents are joint account owners.
- You are subject to a state filial responsibility law that requires you to cover your parents nursing home bills or long-term care costs.
- If you inherit a home that has a mortgage or home equity loan on it, if you wish to keep the home.
A common misconception is that you could inherit credit card debt from your parents if you were listed as an authorized user on the account. This is inaccurate. You are only held liable for consumer debt if you applied for the account or the loan with your parents as a co-signer or joint owner. Otherwise, you are not personally liable, even if you were an authorized user.
What happens when your parent dies with debt?
If your parent passes away with debt in their name, the debt unfortunately doesnt go away on its own.
When they pass away, their personal property and assets will pass to their estate. Then their estate repays any unpaid debt, such as taxes or credit card balances. If the total outstanding debt exceeds the value of the estate, then the remaining debt generally isnt paid.
If your parent has an estate plan, they likely nominated an Executor responsible for overseeing this process. It is common for parents to name their adult child as an Executor, so its a good idea to have a conversation with your parents about their estate plan if youre unsure.
Next, well discuss a few instances when you may be held personally liable for any remaining debt left by your parents.
Must Children Pay the Debts of a Parent?
FAQ
Can you inherit debt from parents?
Should I worry about my parents’ debt?
You don’t inherit debt. Be aware though that debt collectors will try and guilt you into paying. If that happens, don’t send a cent, paying even a little would be acknowledging the debt as yours.
Can you inherit your parents’ student debt?
If a borrower dies, their federal student loans are discharged after the required proof of death is submitted. The borrower’s family is not responsible for repaying the loans. A parent PLUS loan is discharged if the parent dies or if the student on whose behalf a parent obtained the loan dies.
How do I get my parents out of debt?
- Talk with your siblings.
- Talk with your parents.
- Assess their financial situation.
- Make a plan together.
- Keep your spouse in the loop.
- Help them stick to the plan.