Having to deal with debt is probably the last thing on your mind after a family member dies. But debt collectors could make this difficult situation even worse by contacting you. This could make the situation more stressful if you don’t know how debt inheritance works or how to handle money matters following a death in the family.
Letâs take a look at some information that can help you navigate dealing with inherited debt.
Losing a parent is a deeply emotional and challenging experience. On top of the grief, you may also be left wondering about practical matters including what happens to their debt. This guide will help you navigate this complex topic and understand your responsibilities.
Understanding Debt Inheritance
When a person dies, their debts don’t automatically disappear Instead, they become the responsibility of their estate, which is the collection of their assets and liabilities The executor or administrator of the estate is responsible for managing the assets and paying off the debts.
Types of Debt
There are two main types of debt: secured and unsecured.
- Secured debt is backed by collateral, such as a house or car. If the debt isn’t paid, the creditor can seize the collateral. Examples of secured debt include mortgages, auto loans, and home equity lines of credit.
- Unsecured debt isn’t backed by collateral. If the debt isn’t paid, the creditor can sue the estate to recover the money. Examples of unsecured debt include credit card debt, personal loans, and medical bills.
Who Is Responsible for the Debt?
The responsibility for a deceased person’s debt depends on several factors, including:
- The type of debt: Secured debt is typically the responsibility of the person who inherits the collateral. For example, if you inherit your parent’s house, you’re also responsible for the mortgage. Unsecured debt is generally the responsibility of the estate.
- State laws: Each state has its own laws governing debt inheritance. Some states have “filial responsibility” laws, which hold children responsible for their parents’ debts under certain circumstances.
- Joint accounts: If your parent had joint accounts with someone else, the surviving account holder is typically responsible for the debt.
What Happens to the Debt if the Estate Can’t Pay?
The creditors might not be able to get their money back in full if the estate doesn’t have enough assets to pay off the debts. Sometimes, the creditors will consent to a smaller payment to settle the debt. In other cases, the creditors may write off the debt as a loss.
Steps to Take After a Parent’s Death
Following your parent’s passing, you can take the following actions to handle their debt:
- Contact the executor or administrator of the estate. They will be able to provide you with information about the estate’s assets and debts.
- Gather information about your parent’s debts. This includes the names of the creditors, the amounts owed, and the account numbers.
- Contact the creditors. Let them know that your parent has died and provide them with the executor’s or administrator’s contact information.
- Work with the executor or administrator to develop a plan for paying off the debts. This may involve selling assets, negotiating with creditors, or filing for bankruptcy.
Additional Resources
- National Consumer Law Center: https://www.nclc.org/
- Consumer Financial Protection Bureau: https://www.consumerfinance.gov/
- American Bar Association: https://www.americanbar.org/
Disclaimer: This guide is for informational purposes only and should not be considered legal advice. It’s always best to consult with an attorney or financial advisor for specific guidance.
Tips for managing inherited debt
There are some steps you can take to better understand your rights and obligations if you end up with inherited debt. Letâs explore a few possibilities.
What assets can you protect from creditors?
Creditors may not be able to claim certain types of assets if a family member dies. Most of these assets have a designated beneficiary, which is an individual or organization that the asset owner has selected to receive the asset in the event of certain circumstances, such as death. Below are a few examples of protected assets.
A state-regulated arrangement wherein one party holds property for a future beneficiary is known as a trust. By establishing a living trust, an estate can avoid the burdensome probate process, which ascertains the validity of a will, the identity of the beneficiaries, the estate’s value, and the best way to distribute assets to them. A living trust can protect assets from creditors and reduce tax burdens.
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.
Those who are designated beneficiaries of a life insurance policy will likely receive the decedentâs assets directly. Creditors are unlikely to be able to seize these assets.
WHO IS RESPONSIBLE FOR A DECEASED PERSON’S DEBT?
FAQ
Can I inherit debt from parents?
Do I have to pay deceased parents bills?
What debts are forgiven at death?
Can debt collectors go after family of deceased?
What happens to debt after a parent dies?
Without infighting, selling assets, paying bills, and distributing funds typically doesn’t take long. Debt doesn’t disappear after a parent’s death. After-death debt is usually paid off by the administrator with your parent’s money or property as part of their estate, and according to state law. Share any debts you know of with the will’s executor.
Do debts go away when a person dies?
As a rule, a person’s debts do not go away when they die. Those debts are owed by and paid from the deceased person’s estate. By law, family members usually don’t have to pay the debts of a deceased relative from their own money. If there isn’t enough money in the estate to cover the debt, it usually goes unpaid.
Who owes a debt if a deceased person dies?
If there was no co-signer, joint account holder, or other exception, only the estate of the deceased person owes the debt. If there is no money or property left in the estate, or the estate can’t pay, the debt will generally not be paid.
Do you have to pay a deceased relative’s debt?
Those debts are owed by and paid from the deceased person’s estate. By law, family members usually don’t have to pay the debts of a deceased relative from their own money. If there isn’t enough money in the estate to cover the debt, it usually goes unpaid. But there are exceptions to this rule. You may be personally responsible for the debt if you