Statistically speaking, almost three out of four people are going to die with debt, which raises a very real concernfor spouses and children of the deceased: Can you inherit their debt?
Good news:In nearly all circ*mstances, youwon’t!
The deceased’s estateis responsible for settling most, if not all, debts. If there is not enough money in the estate to pay off those debts – in other words, the estate is insolvent – thedebts are wiped out, in most cases.
Liquidating the assets of the estate and paying off all the bills will reduce or maybe even wipe out the money that survivors would have inherited, but that is the tradeoff for not having responsibility fordebts after a death.
» Learn More:Financial Help for Widows
Settling an Estate
Dealing with the death of a relative shouldn’tincludestress created by letters and telephone calls from creditors insistingonpayment. There are laws that protect people from inheriting debt, so if a credit card company solicits payment upon a family member’s death, be cautious before paying it.
Creditors in search of payment must present their request, in writing, to an attorney for the estate or the named executor within six months of the estate being opened. No claims are acceptedafter that time and not all claims will be paid.
Some creditorsdon’tbother to file a claimwith the estateand instead pressure members of the family to clear the debtwith their own money. If you aren’t a co-signer or joint debtor, you aren’t responsible.
In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, creditors may pursue a surviving spouse to settle a debt. In three states – Alaska, South Dakota, and Tennessee – spouses can opt into the community property system or designate specific assets as community property.
If creditors continue to harass you for payment as a family member, write a letter or contact your attorney to demand they stop all contact. Under the Fair Debt Collection Practices Act, creditors aren’t allowed to discuss someone’s debt with relatives, neighbors or friends.
Claims filed within a six-month timeframe of the estate being opened areverified by the executor andpaid in order of priorityset by state and federal laws.
This is the typical order of payment:
- Fees such as fiduciary, attorney, executory and estate taxes
- Burial and funeral costs
- Family allowance, depending on state statutes
- Outstanding federal taxes
- Medicaldebt not paid by insurance
- Property taxes
- Credit cards and personal loans are usually at the bottom of the list.
» Learn More:Estate Collections
Solvent vs. Insolvent Estate
One of the confusing issues for survivors of the deceased is understanding the difference between a solvent estate and one that is insolvent.
A solvent estate is one that has enough money to pay all the decedent’s bills. An insolvent estate means there is not enough money to pay all the bills. The creditors would line up in the order given above and be paid accordingly.
If the money runs out before all bills are paid, the businesses at the bottom of the priority list must write off the debt. The deceased’s heirs would receive no money.
What Debts Can Be Inherited?
There are some debts that can be passed down, based on how the debt is owned. For example:
- Mortgages or home equity loans. If you inherit a house that has an outstanding mortgage, home equity loan or HELOC on it – and want to retain the house – you must stay current with payments. Even if you plan to sell the house, you must stay current with payments, until the house is sold.
- Cosigned debts. If you co-sign a loan or credit card agreement with someone, you already agreed to be responsible for payment if they default. That responsibility remains, even after the death of one party.
- Joint debt: When a loan or credit card is issued to two people based on their combined income and assets, it is called a “joint debt.” The surviving member is responsible for any joint debts.
- Community Property. If you are married and live in one of the nine states that are community property, the surviving spouse must repay all debts acquired during the marriage.
- Similar to houses, if you want to retain the benefits of a timeshare, you must keep up the payments.
Credit Card Debt After Death
Credit card debt isunsecured debtand the responsibility of the estate unless you have co-signed the agreement or used it as part of joint debt agreement. It is near the bottom of the list of debts to be paid.
» Learn More:Credit Card Debt Help
Steps To Take When a Credit Card Holder Dies
When a cardholder passes away, there are steps you can take to ensure the debt is managed properly.
- Make a list of the deceased’s credit card accounts and notify the companies of his/her death.
- Notify the major credit bureaus (Experian, Equifax, TransUnion)
- Stop using any cards on which you were an authorized user
- Make payments on any jointly held cards or cards you co-signed
If there are funds available from an IRA or 401k account and there is a designated beneficiary (or beneficiaries) that money will pass directly to the person (or persons) and not be used to pay off the deceased person’s bills.
If, however, the estate is the beneficiary, the moneyfrom an IRA or 401k accountwill go into the pool with other liquidated assets and be used to pay the decedent’s bills.
» Learn More:What Happens to Retirement Money When You Die?
Medical Debt After Death?
The cost of medical care, especially for those at or near retirement age, is climbing so fast that it should scare everyone in the family. The average couple retiring in 2022 will need more than$315,000 for medical expenses for what’s left oftheir lifetime.
Medical expenses are the responsibility of the deceased member’sestate. All assets are liquidated and used to pay creditors on a priority list. Paying medical bills is high on the priority list ifthe estate is solvent.
However, if the estate is insolvent (not enough money to pay off bills), then the responsibility could fall on the children under laws known as “filial responsibility.”
There are 30 states with filial responsibilitylaws that impose a duty on adult children to support their parents. There is a greatdeal ofroom for interpretationin the statutes governing each of those states,and the language used is very ambiguous.
If you live in one of the 30filialresponsibilitystates, itwould be wise to investigate how much support is expected and from whom. Also, be aware that even though the aging population in America is growing fast, filial responsibility laws havebeen lightly enforced.
One other thing to note: If your parent was on Medicaid, the state might put a lien on the sale of your parent’s homein order torecover the cost of their care.
Who Pays Nursing Home Debt?
As is the case with medical care, the deceased member’s estateis liable for all nursing home debts. It’s when the estate is insolvent that things could get complicated.
The states with “filial responsibility” laws are seeing more and more nursing homes try to get payment from the adult children of the deceased.
The reason is that thetab for long-term care of the aging in America is up to $130,000 and many of the 1.4 million Americans in nursing homes can’t afford it. An estimated 64% ofnursing home residentsrelyonMedicaid, which doesn’t always cover the whole bill.
Federal law requires Medicaid programs in each state to cover nursing home care, but sometimesMedicaidfunding goes down and states decrease the amount they will pay or put eligibility restrictions on coverage.
The best advice is toread the fine print carefully andavoid signing any agreementthat makes you a guarantor.
Can You Inherit Student Loan Debt?
Federal student loan debt is not transferable to a family member, as long as someone in the family submits the deceased person’s death certificate. When that happens, your federal student loan debt is discharged.
The same is true for Federal PLUS loans. If the parent borrower or student the PLUS loan was taken out for dies, the debt will be discharged.
The only exception is if you co-signed the student loan. This usually is done with private loans. In that situation, the cosigner may find themselves responsible for what’s left of the student loan debt. Check with the lender to see what their policy is on this matter.
If the loan was taken out after Nov. 20, 2018, and the student borrower dies, the lender must release the co-signer based on a provision in the Economic Growth, Regulatory Relief and Consumer Protection Act.
Settling Secured Debt
Secured debts, such as a car loan or a mortgage,whichare owed after the account holder’s deathare not the spouse or children’s responsibility, unless they co-signed the agreement.
The lienholder will either reclaim the property or a relative can assume responsibility for the debt through refinancing. The same is true with most reverse mortgages — you can refinance the loan if the home has been left to you.
If you are named executor of an estate, it’s important to seek legal advice before paying any money out. If pressured by creditors, remind them that debts are paid in accordance with the laws of your state. Do not promise to pay out of your own pocket, as it is not your responsibility unless you signed your name on the loan or account.
Since a high debt load can cut into the inheritance, it is vital that senior citizens review their financial portfolios, retirement savings and obligations and avoid co-signers if possible.
And survivors should remember that debtors get paid first andwill want all assets liquidated to make that happen. What isleft over is split among the heirs.
» Learn More:Nonprofit Debt Settlement
Advice for Dealing with Debt After the Death of a Family Member
Because a person’s estate is largely responsible for paying debts, the first thing to do would be the find out who the executor or administrator is for the estate. That is the person who pays debts with money from the estate.
Next, you should know (or research), whether you shared responsibility for any debts with the deceased. Those debts could be secured, like a home or car loan, or unsecured, like a credit card, medical bills, or student loan.
If the executor of the estate is not sure about your responsibilities, contact a lawyer and ask for a consultation on the matter to determine whether you are legally bound by any of the debt and if you have any options for settling them.
If debt collectors directly contact you, either you or your attorney should ask for specific information regarding the debt and why you should assume responsibility.
There could be several collection agencies involved and their claims against you or the estate, could be bogus, so keep good notes about any discussions you have. Get the name of the person; the date you spoke, the subjects discussed, and any follow-up actions needed.
Help For When You Have Inherited Debt
Dealing with debt at any stage of life can be difficult, but it can be really tricky when a person dies and debt collectors swarm over the relatives trying to be the first in line to get paid by the estate.
If you are unsure how to handle debts after death, a phone call to a nonprofitcredit counseling agencymight help you understand what are – and what aren’t! – your obligations. Credit counselors are trained and certified in how to deal with debt, and they are forced, by law, to offer advice that is in the consumer’s best interest.
Don’t make any emotional or moral judgments about what to do in this situation. Let a credit counselor or experienced estate attorney guide you through the process.
