Who is Responsible for Deceased Parents’ Debt?
If you’ve recently lost a parent, you’re probably going through the grieving process right now. You may be dealing with other practical matters, such as maintaining their home or packing up their belongings. You’ll also need to go through probate with their estate unless they placed everything in a trust. As letters from creditors come in, you may wonder who inherits parent’s debt. If you are concerned about having legal responsibility for your parents’ death, the short answer is no unless you have joint debt.
The first step in dealing with your parents’ estate and debts is to file a petition to open probate. You will file with the county clerk in the county where your parent lived. The probate court will appoint someone as executor of the estate. This gives them the right to act on behalf of the estate. Many times, it is the surviving spouse or an adult child. The deceased person may have stipulated in their will who they wanted to act as executor. This person doesn’t inherit debt even though they are acting on behalf of the estate.
How Much and What Kind of Debt is Against the Estate
One of the first duties of the executor is to notify creditors. Some states require them to send letters to all known creditors and to publish in a newspaper for any unknown debts incurred. Other states only require the notice to be published to notify any unknown creditors.
Once the creditors are made aware of the probate process, they can submit claims against the estate. As the claims come in, the executor must determine if they are valid. If the debts incurred are valid, the executor must pay the debts out of the funds of the estate. If they don’t believe they are valid, they can deny the claim. It is up to the creditor to petition the court to have their claims paid and show evidence that they are legitimate.
In this situation, all of the parent’s debts are paid out of the estate. Once those debts have been paid, the remaining assets can be distributed among the heirs.
Dealing with the Deceased Parent’s Debts
The first step in dealing with any bills and debts that your parents accumulated is to contact the creditors and let them know of their death. This includes the credit card company, auto lenders, and other creditors. They will close out the credit card or account to prevent new charges from accumulating. This also lets the debt collector know that the bills will be settled in probate. Probate can take months, but they cannot hound you for the money while they wait.
Secured vs. Unsecured Debt
Your parents may have had either secured or unsecured debt or both prior to their death. How you handle each kind of debt for the estate will vary.
Secured debt means that the loan is backed by some kind of asset or property. A car loan and mortgage are examples of this kind of debt. The secured property can be sold or given back to the creditor to pay off the debt. Be aware that if the value of the item isn’t enough to pay the balance owed, the estate is still on the hook for the rest.
Unsecured debt doesn’t have any assets attached to it. Examples of unsecured debt include credit card debt and personal loans. The creditors have nothing they can take back if the debt isn’t paid. Unsecured debt is usually a lower priority to pay than secured.
Joint Owner vs. Authorized Signer
When considering if the children of the deceased have a responsibility to pay their parents’ debts, it may depend on how they are involved. In most cases, they aren’t liable for the debt their parents incurred. The creditors won’t get paid if there isn’t enough money in the estate. This includes selling off all assets to pay the debts.
There are two ways you may be involved in your parents’ estate legally. The first is as an authorized signer on their checking and other accounts. This allows you to sign checks and pay bills for them using their account while they are still alive. Once they are deceased, you no longer have access to the accounts until it is determined by the probate court who will be the executor.
A joint owner of an account means that you have equal access and responsibility of the account as your parent. This situation is often seen with a auto loan or mortgage, but it can also include credit card debt and other accounts. The parent co-signed on the account because they had a better credit report. In this case, the joint credit card account may be closed because of the death of one of the owners, but you will still be inheriting debt and be responsible for paying the outstanding balance.
Community Property States
In a community property state, the surviving spouse becomes responsible for the person’s debt after their death. They must pay marital debts, such as credit cards, personal loans, and other bills. They assume the outstanding mortgage or home equity loan, especially if they are a joint account holder. In essence, they are inheriting debt from their deceased spouse.
What Happens If the Estate Can’t Pay the Debts?
If there isn’t enough money or liquid assets to pay the creditors what is owed, the executor will need to begin selling off non-liquid assets to get access to the funds needed. This includes jewelry, artwork, and antiques as well as cars and real property. They may begin by selling anything that isn’t specifically designated for an heir, but they are allowed to sell those assets if necessary to repay the debts.
Some states allow the executor to make decisions on what to sell and for how much independently while other states may require approval from the probate court. Either way, it is expected that the executor will act in the best interests of the estate for the price of the items sold.
If, after liquidating all the assets of the estate, there are still outstanding debts, the creditors may take a loss. In most cases, they cannot go to the beneficiaries for payment of the deceased parents’ debts. However, there is an exception to this rule.
Many people amass a great deal of medical debt before their death if they have been sick for some time. Medical bills add up quickly and can be in the thousands of dollars. Hospitals, nursing homes, and other medical creditors seek to recoup at least part of the debt when someone is deceased.
Thirty states have created laws that make the adult child responsible for their parents’ unpaid medical bills if the estate can’t pay the balance. This is known as filial responsibility laws. Even though many of the states don’t impose these laws, cases have been won in the past for medical facilities that sued the adult children.
Transfer of Debt
There is another situation where you may assume responsibility for the debt of your deceased parent. If the deceased gave you an asset tied to a loan, such as a car or house, you would become responsible for the outstanding balance.
If you fail to make the car loan or mortgage payments, the creditor won’t go after you personally for the money. But they will begin the process of recovering the asset through repossession or foreclosure. This gives them the right to sell the asset to recover their losses.
Should you choose to keep the estate asset, you will need to assume responsibility and continue the payments or pay off the balance. You can also seek to refinance for lower terms and payments.
Assets Protected from Creditors
There is a way for you to leave money to pass directly your beneficiaries without going through the creditors first. Certain estate’s assets can avoid being included in probate if they have a designated beneficiary. This includes life insurance policies, retirement accounts, bank accounts with a transfer on death (TOD) or pay on death (POD) named beneficiary.
These assets do not have to be probated, which means they can go straight to the named beneficiary without being used to pay for the deceased’s debts. This doesn’t mean the creditors won’t try to get you to use the accounts to pay the debts.
What if a Collector Harasses You for Your Parents’ Debt?
Just because you may not be responsible for your deceased parents’ debt, it doesn’t mean the debt collectors won’t try to contact you. They are only legally allowed to contact you for the name and contact information for the person legally responsible for paying the debts, which would be the executor. If the debt collectors contact you beyond this, you can report them for violating the Fair Debt Collection Practices Act. State and federal laws are designed to protect family members from harassment for other people’s debts.
Will Debt be Forgiven?
Most debt doesn’t automatically go away when someone dies. Federal student loans and parent PLUS loans are forgiven when both parents died. Other debts, such as credit card debt, will be forgiven if the estate doesn’t have any money to pay the amount owed. However, you don’t have to use your own money to pay these debts.
In states with filial responsibility laws, the adult children may be held responsible for their parents’ medical bills. Each state has its own rules, such as Arkansas that limits the responsibility to mental health care. The adult children must have the means to pay, which means that most low and middle-income households won’t be held responsible. It cannot cause a burden to the family, which limits the application of the law to higher-income
Seek Sound Legal Advice
If you are involved in settling your parents’ estate, you should seek the counsel of an experienced estate planning attorney. They can help you deal with creditors as part of the deceased’s estate. They know the laws in the various states, including community property states, and which family members inherit property if there are outstanding debts after the parents die.