Inheriting Debt: Next Steps To Take
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Losing a family member is extremely difficult and painful. Money is the last thing that will come to your mind while you grieve, but you must also understand that there will be assets as well as debts left behind by your loved ones, and they can impact you as well as your family.
It is natural to think that you might get an inheritance, and this is not a thought you can express openly, but it is a reality. But what if instead of getting money in inheritance, you end up saddled with inheritance debt? Debts do not go away when an individual dies. What do you do then?
We do like to believe that we will live forever, but life has its own plans. If someone you love passes away unexpectedly, their estate is used towards settling their debts. But if the estate cannot cover it or you held the debt jointly, you just may inherit the debt.
It might be the worst-case scenario, but it is not something you take lightly. It helps to know what steps to take and how to handle them. In this article, we take you through all the steps you must take when inheriting debt.
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What debts are inherited?
The good news is that not all debts can be inherited. However, certain debts can be inherited if a loved one dies. If their estate does not cover all the debts, these are debts you may inherit.
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Joint and consigned debts
Whenever you are on a joint account with somebody, like a joint credit card or a personal loan, you are responsible for the debt, whether that person is alive or deceased. These agreements stand even after the borrower's death, so you will have to make the payments if the estate cannot pay them.
However, in most cases, authorized users on credit cards will not be responsible for credit card debts.
Credit card debt
It depends on where you reside when managing credit card debt. If you were a co-signer on a loan or held a joint account with a loved one, you are responsible for the debt. But if it was an individual account, you might not owe anything unless you reside in the community property state where any debt you incur during the marriage will be considered joint. If you do not live in a community property state and are not a joint account holder, you will not inherit the credit card debt.
Mortgages and home equity loans
When a loved one dies with an outstanding mortgage or a home loan, you need to consider what to do with the asset and how to handle the debt. If you inherit a home from them after their death and they have a home equity loan on it, you will inherit the debt if you keep the asset. If you decide to sell the property, you must stay current on the mortgage payments until the sale is final and the debt is repaid.
However, if you sell a property, pay off the debt, and have money left over, you get to keep the equity.
Medical debt
There is no specific rule for medical debt. If the spouse or parent dies with it, their assets are used towards paying it, and if it exceeds their assets, creditors might simply write off the debt. This means you do not have to worry about paying it off. However, if you are a co-signer on the medical bills or reside in the community property state, it could become your responsibility to pay the medical bills. Many nursing homes, for instance, will pass the debt to family members to pay using estate funds.
Community property states law
Some states have state or community property laws where the surviving spouse has to pay a part of the deceased spouse’s debts with the community assets. These include Washington, Arizona, Idaho, Nevada, California, Louisiana, New Mexico, Wisconsin, and Texas.
That said, there are three states — Tennessee, South Dakota, and Alaska — where a spouse can opt into the community property system or designate debt or certain assets as community property.
Timeshares
If there is a deeded timeshare, the heir inherits the benefits of it as well as any payments that come along with it. Based on the company’s policy, the heir might also have the option to decline the share, and in that case, it will be offered to the next of kin. If both decline it, there will have to be a foreclosure, and the resulting debt will be taken from the estate.
Which debts cannot be inherited?
Not all debts can be inherited. Some kinds of debt will not be passed on to the spouse or family members. These include:
- Federal student loans
- Individually held credit card debt and unsecured loans.
Although these debts are not inherited, they are not automatically canceled either. Instead, the assets in their estate will be used to pay off the creditors who submit a claim. When the debt exceeds the estate assets, the creditor might write off the debt and not hold anyone else responsible for paying it.
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What assets are safe from creditors?
Some assets are protected from creditors in case of the death of a loved one. Such assets are known as non-probate assets because there is a joint tenancy along with the rights of survivorship or a designated beneficiary. Hence, it is possible to bypass the probate process and get the assets directly, even if there is no will.
Here are the assets that are protected from creditors.
Life insurance
When you are a beneficiary of someone’s life insurance, it will pass to you, and the creditors will not be able to take it.
Retirement accounts
When they have an IRA, a 401(k), or another form of retirement account and you are a beneficiary, it will directly go to you, and the creditors cannot take it.
Living Trust
A trust is a legal arrangement that will hold the assets of a beneficiary and could bypass the entire probate process. Creating a trust helps protect an estate from the claims of a creditor.
Steps to take after inheriting debt
Understand the facts
Whenever you lose a family member, debt collectors will come calling, but they will not claim that you are the one responsible for clearing all the debts unless you are legally under an obligation to do so. Once you know that you have inherited debt, you will need to look through the deceased’s financial documents and paperwork. Make a note of all the person’s debts that are owed. You must keep in mind that all the debts might not be your responsibility based on whether it is considered an individual debt or joint debt.
The Fair Debt Collection Practices Act will state what debt collectors can and cannot do. For one, they cannot harass you or threaten you with calls. Next, they cannot claim to take property they are not legally entitled to. When you notice that a creditor is not acting within his rights, simply send them a letter requesting them to stop.
Identify probate and non-probate assets
Through a process known as probate, the court will decide if a will is valid or not. It is a retitling process of the decedent’s assets, and in the process, any debt has to be paid before the probate assets are distributed to beneficiaries. The probate rules vary by state, and it helps to check them before you proceed. Every state will have its set of rules for the period of time the creditors can make a claim and how the debts are prioritized.
The estate’s executor will have to collect the estate’s assets, clear all bills, and then divide the remaining assets as per the will. Without a will, the assets will have to be divided by state law. Every asset will not pass through probate; when they don’t, one cannot use it to pay the estate’s debt. Such non-probate assets require a trust owner, joint owner, or beneficiary. Besides that, probate assets should pass through probate and will be distributed to the heirs as per will. Such assets do not have a beneficiary. The table below shows the probate and non-probate assets.
Probate Assets | Non-Probate Assets |
Business interests | Living trusts |
Stocks and bonds | Retirement accounts with a named beneficiary |
Real estate | Real estate or other assets held as a joint tenant. |
Bank accounts | Life insurance with a named beneficiary |
Boats and vehicles | Joint bank accounts |
Check the insurance policy
Insurance might be able to cover a mortgage or another sizable debt, and you need to check the policy to ensure that is the case. If you are liable for a debt, speak to the lender to review the loan terms and check if there is any liability on you.
Contact the lender
An executor of the estate will have to share a copy of the death certificate with the creditors. After this, the creditors will pause collecting the unpaid bills while the estate is cleared. Your creditors will inform each credit bureau of the death, which will stop others from using the deceased individual’s name for new loans.
Also, remember to write to the credit bureaus to update the credit report. If you are liable for the debt and have little money to pay it, contact the lender immediately. Many lenders and banks can negotiate the debt down or stop the interest on the debt from accumulating, thus, reducing the debt burden.
What if you cannot pay the debts?
Many creditors cancel the debt that cannot be paid out of the estate because of insufficient assets. However, if collection accounts come up after the probate, the family members are not responsible for paying them until and unless jointly owned.
Per law, collectors can only discuss the collection accounts with a deceased person’s parent, spouse, executive, administrator, or guardian. The collectors can also contact other relatives to get more information about the individual responsible for paying the debts. In such a situation, having an attorney by your side is best.
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FAQs
Do parents inherit debt if we die?
No, parents will not be responsible for a child's debt unless they are joint account holders, primary cardholders on a card where the child is an authorized user, or are cosigners.
Is probate always necessary?
No, probate is not a mandatory requirement. It is not necessary if there are no assets or when the assets will pass to their heirs without the need for probate. You can avoid probate if the property is held by a revocable living trust or the assets have a beneficiary.
Can adult children inherit their parent’s medical debt?
The medical debt will be paid by the estate of your parents. If the estate does not have adequate assets to cover the bills, the creditors could write the debt off. However, adult children who are co-signers for treating parents in a community property state will be responsible for settling the debt.
Is it possible to inherit student loan debt?
After the death of someone, the remaining federal student loan debt will be discharged if the surviving family member shares proof of death. Private student loans are usually discharged on death. Many lenders do hold the co-signer responsible for the student loan debt even after the death of the borrower.
What happens to the car loan when somebody dies?
When someone dies before paying off a car loan, this loan will become a part of their estate, and the estate executor will have to pay off the debt with the available assets. Then, if anything remains, it will be distributed through probate. In case the loan has a co-signer, then the car, as well as the payments, becomes the responsibility of the co-signer.
The bottom line
When it comes to inherited debt, individual or joint, the family members will not get anything from the estate assets or cash until the deceased’s debts are completely satisfied. Hence, talking to creditors can make a lot of difference when paying little or more in case of debt. If the debt collectors think you are responsible for your loved one and you now know how to proceed, you need to hire a lawyer for legal advice.
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Writer
Vandita Jadeja is a financial writer and editorial assistant at Joywallet. She loves to read and write about money and brings 7 years of experience from the financial industry. She loves coffee, mountains and sunsets.
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