October 17, 2023 |6 min read
When a family member passes away, inheriting debt is likely one of the last things you want to think about. But debt collectors could make this difficult situation even worse by contacting you. If you’re not sure how debt inheritance works or how to handle financial matters after a death in the family, this could add extra stress to the circ*mstances.
Let’s take a look at some information that can help you navigate dealing with inherited debt.
Key takeaways
- A deceased person’s debt doesn’t die with them but often passes to their estate.
- Certain types of debt, such as individual credit card debt, can’t be inherited. However, shared debt will likely still need to be paid by a surviving debtholder.
- There are laws that protect family members from aggressive debt collectors who may use questionable methods to collect debts.
- Legal advice from a qualified professional can help determine which debts a family is responsible for.
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Sign up todayDo you inherit your parents’ debt?
If a parent dies, their debt doesn’t necessarily transfer to their surviving spouse or children. The person’s estate—the property they owned—is responsible for their remaining debt. Typically, a representative of the estate will use the estate’s assets to pay any outstanding debt instead of a spouse or child having to pay out of their own wallet.
If the estate doesn’t have enough money, the estate’s debts might go unpaid. Generally, family members don’t have to pay the debts of a loved one who passes away unless they’re shared debts.
Inherited debt repayment can vary by the type of debt. For example, secured debt, like a car loan, might be handled differently than unsecured debt, like a credit card.
What debts can be inherited?
There are a few types of debt that you can inherit. Here are a few situations where you might be liable for debts your family member’s estate couldn’t pay for.
Home equity loans on inherited houses
Inheriting a family member’s home after they die can result in financial liabilities. If the decedent—the person who died—had a home equity loan or mortgage, the recipient could wind up with their debt.
Co-signed and joint debt
Those who have joint accounts—like a joint credit card—can wind up with a co-holder’s debt if that person dies. Co-signers can also be responsible for a decedent’s debt. This doesn’t apply to authorized users, though.
Community property state debt
Community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—might have different requirements for a spouse handling their deceased partner’s debts. The spouse may have to pay for some of their late spouse’s debts using community assets.
States have different definitions of community property, but in general, the term refers to property acquired by the couple during their marriage. Consider checking your state’s laws to understand the terms.
What assets can you protect from creditors?
Creditors may not be able to claim certain types of assets if a family member dies. These assets typically have a designated beneficiary—a person or entity the asset owner has chosen to receive that asset upon certain conditions, including death. Below are a few examples of protected assets.
Living trust
A trust is an arrangement regulated by state law in which one party holds property for a future beneficiary. Setting up a living trust can allow an estate to bypass the complicated probate process—which determines if there’s a valid will, who the beneficiaries are, the value of the estate and how to transfer the assets to the beneficiaries. A living trust can protect assets from creditors and reduce tax burdens.
Retirement accounts
A retirement account, such as a 401(k), Roth IRA or other type of retirement investment, might be protected. These often go directly from the late account holder to the beneficiary.
Life insurance
Those who are designated beneficiaries of a life insurance policy will likely receive the decedent’s assets directly. Creditors are unlikely to be able to seize these assets.
Do adult children inherit a parent’s medical debt?
Medical debt will likely be paid for by the decedent’s estate. If their estate doesn’t have enough assets to cover the medical bills, the creditors might write the debt off. Adult children or surviving spouses who were co-signers for their treatment or live in a community property state, though, could be responsible for settling the health care debt.
Can you inherit student loan debts?
If someone passes away, any remaining federal student loan debts are discharged if a surviving family member or representative submits proof of death. This can include a death certificate—either the original or a certified copy.
Generally, private student loans are also discharged upon death. But there are some lenders that will hold a co-signer responsible for student loan payments even after the borrower’s death.
Tips for managing inherited debt
When you wind up with inherited debt, there are a few actions you can take to better understand your rights and obligations. Let’s explore a few possibilities.
Consider getting legal help
When someone in your family dies, it’s possible that debt collectors will contact you to pay debts. It’s also possible that they’ll be aggressive and may take advantage of you if you’re not familiar with the rules that govern them.
A lawyer can help you determine which of the decedent’s debts are your responsibility. It’s also worth understanding the Fair Debt Collection Practices Act, which regulates debt collectors. The act protects beneficiaries from threats and harassment. And consumers can submit complaints to the Consumer Financial Protection Bureau.
There are also legal aid offices and clinics that can help those who can’t afford an attorney.
Take steps to prevent credit report issues
A person’s credit reportsaren’t automatically closed after they pass away. It can be wise for family members to inform credit bureaus of their loved one’s death.
Informing one of the three major credit bureaus—Equifax®, Experian® and TransUnion®—is often a good preventive step. You might need to mail in your late family member’s death certificate along with their legal name, Social Security number, date of birth, date of death and other information the bureau requires. That credit bureau will typically notify the other two credit bureaus.
This will seal the deceased’s credit reports to avoid potential identity theft.
Debt inheritance in a nutshell
It’s possible for parents to die and leave surviving family members with debt. But there are ways to protect assets from debt collectors so that the assets can go to family members. Legal professionals can provide specifics about your local laws and any exceptions.
Planning for your future? Learn more about preparations that can help your family in the event of your death.
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