We frequently receive this question about the possibility of children inheriting the debts of their parents.
What happens to a person’s debt after they die? My mother has taken on a lot of medical and credit card debt over the past few years and I’m worried that my brother and I will be responsible for it when she dies. What can you tell me?
In most cases, when a person passes away and leaves behind unpaid debt, it’s the deceased individual’s estate, not their kids, that is legally responsible to settle the debt. Here’s how it works.
When your mom dies, her estate – which consists of the stuff she owns while she’s alive (home, car, cash, etc.) – will be responsible for paying her debts. If she doesn’t have enough cash to pay her debts, then the executor of her estate will have to sell her assets and pay her creditors with the proceeds.
Whatever is left over is passed on to her heirs as dictated by the terms of her will, if she has one. If she doesn’t have a will, the intestacy laws of the state she resides in will determine how her estate will be distributed.
If, however, there isn’t enough money left over to pay her “unsecured debts” (e.g., credit cards, medical bills, personal loans) then her estate is declared insolvent and her creditors will have to suffer the loss.
“Secured debts” – loans attached to an asset such as a house or a car – are a different story. If she has a mortgage or car loan when she dies, those monthly payments will need to be made by her estate or heirs. If they are not paid, then the lender can seize the property.
There are, however, a couple of instances where you would be legally responsible for her debt after she passes away. The first is if you are a joint holder on a credit card account. Another instance is if you co-signed a loan with her.
NOTE TO SPOUSES: These debt inheritance rules apply to surviving spouses too, unless you reside in a community property state – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin. In these states, debts that one spouse acquires after the start of a marriage belong to the other spouse too. Therefore, spouses in community property states are usually responsible for their deceased spouses’ debts.
Protected assets
Some assets, like IRAs, 401(k)s, brokerage accounts, life insurance policies or employer-based pension plans, are protected in some states from creditors’ claims. Typically, these assets are transferred directly to designated beneficiaries without passing through the deceased individual’s probate estate.
Settling her estate
You also need to be aware that if your mom dies with debt, and she has no assets, settling her estate should be fairly simple. Her executor will need to send out copies of her death certificate and letters to her creditors explaining the circumstances. That will likely take care of the situation, but you and your brother may still have to deal with aggressive debt collectors who try to guilt you into paying your mom’s debts.
If your mom has some assets, but not enough to pay all her debts, her state’s probate court will be able to provide a list that details which debts get priority. The details vary by state but, generally, estate administration fees, funeral expenses, taxes and medical bills get paid first, followed by secured debts and lastly, credit card debts.