It’s quite common for Americans to die with some debt in their names. Based on 2016 data from Experian, it’s estimated that Americans die with an average debt of $61,544. Not taking into account their mortgage debt, the average falls to $12,875. Credit card debt is the most common type of debt of Americans who passed away, followed by mortgage, car loan, personal loans, and student loans.
Death is part of life, but nothing in this world can ever adequately prepare you for losing your parents. Aside from the emotional stress caused by their passing, burial and funeral costs, you may have to deal with other issues if they died with big debts.
The question now is, “Are children responsible for their parents' debt?” Fortunately, you should not have to worry about this.
Will You Inherit Debt From Your Parents?
Does debt get passed down to the deceased parent’s children? In most cases, the answer is no. You will not inherit debt from your parents including their personal loans after they pass away unless you’re a joint account holder on a loan or you co-signed for their debt before they died.
The US consumer protection agency, The Federal Trade Commission (FTC), said that you’re not obliged to pay debts from your parents who have passed away. The deceased person’s estate is responsible for paying for any outstanding payment.
Just in case collectors harass you into paying off what your parents owe, you can refer to the Fair Debt Collection Practices Act (FDCPA). It’s a law that protects you from abusive, unfair, and deceptive debt collectors.
What Happens to Your Parent’s Debt When They Die?
Their debt won’t go away after they die, but the responsibility of paying it off will fall under your deceased parent’s estate. If your parents left a will, the person named to take care of their finances after their passing will have to deal with their debts as well.
In case your parents had no will, the court will choose a personal representative or an administrator who will take on the responsibility. Under the probate process, an executor will be appointed to handle the estate’s finances, including paying debts left by the deceased using the money from the estate.
When Can You Inherit Debt Your Parent’s Debt?
When can you inherit debt? According to the Consumer Financial Protection Bureau, there are some situations when you’ll be legally responsible for taking on your parents’ debt.
- You co-signed for your parent’s debt obligation
- You’re a joint credit card account holder
- You’re a joint owner of a property with your deceased parent
Other instances when individual debt can be passed on to the people left behind include debt in community property states and when an inherited home comes with a home equity loan.sni
How to Handle the Debt of Your Parents When They Pass Away?
Once your parents’ estate undergoes the probate process, the executor or an attorney will create a list of creditors that require repayment. Secured debts are given more priority than unsecured personal debts. So, if your parents left you with an inheritance, don’t spend or sell it right away. It would be used to pay off your parent’s outstanding debt.
Car loans and home loans are the most common examples of secured debt. It’s a type of credit with assets attached as collateral. So, when your parents die, and they still have outstanding secured debt, the assets pledged as security can be sold or returned to pay off the loan.
Meanwhile, any unsecured debt like credit card loans has no collateral attached to it. Therefore, the creditor won’t have any assets to seize to recoup their losses when your parents pass away. They cannot force you to pay using your money or assets.
All the assets under your parent’s name will undergo the probate process, so they can be used to pay off the debt they left behind. These estate’s assets are referred to as probate assets, which include:
- Personal properties
- Vehicles
- Bank accounts
What Happens When Your Deceased Parent’s Estate Can’t Pay Debts?
The estate will be considered insolvent and any probate asset will be used to repay the debt. Any remaining balance, which was not covered, will be written off.
If a secured debt, such as a mortgage or auto loan isn’t repaid, the lender may seize the asset that backs the loan. You have to continue paying back the loan if you want to keep your parent’s assets.
What Kinds of Assets Are Protected From Creditors?
Not all of the estate’s assets can be used to pay off debt. Non-probate assets don’t go through the probate process, and they’re passed on directly to the beneficiary. They’re generally not used to pay off debt but creditors may still file a claim. These include:
- Life insurance policies
- Qualified retirement accounts
- Jointly owned bank account
- Bank accounts with a designated TOD (transfer on death) or POD (payable on death) beneficiary
What if collectors chase you for your deceased parents’ debt?
A debt collector cannot contact you about your parents’ debt unless you were named as a guardian, executor, or administrator of your deceased parents’ estate. Furthermore, collectors can only discuss the matter with the deceased’s spouse or any other person who has been authorized to settle the deceased’s financial debt. See Fair Debt Collection Practices Act (FDCPA) we mentioned above.
FAQs on Inheriting Debt From Deceased Parents
1. Who pays for the deceased’s medical bills?
Your parents’ medical bills will remain after they die, but that doesn’t mean you have to pay them. Just like all other debt left by your deceased parents, medical debt is paid by their estate.
You may be responsible for your parent’s medical debt if:
- You signed a legal document saying you’ll pay the medical bills or nursing home debt
- The medical institution used the filial responsibility laws to ask you, as an adult child, to pay for your parent’s unpaid bills. Filial responsibility laws vary per state and only 30 states have such laws.
2. Can your parent’s debt be collected from your inheritance?
Are beneficiaries legally responsible for debts left by the deceased? If your parents died broke but left you an inheritance, you may not get the whole amount, or worse, receive anything at all since creditors may file a claim against your parents’ estate.
The estate must settle the debts first before the assets are distributed to the inheritors. Otherwise, the heirs may inherit debt.
Let’s say your parents took out a loan and used your home as collateral. You may lose the house even if you have inherited it if your parents still owe money to the creditor and the latter decides to seize the property to recoup their losses.
3. What happens to your parent’s unpaid taxes?
You will not be responsible for the taxes owed by your parents at the time of their death. Any unpaid taxes will be settled by the estate.
4. What debts are forgiven at death?
Federal student loan debts are automatically forgiven at death. Parent PLUS loans are also forgiven when both parents who borrowed or the student whom the loan was intended for dies. However, the death of only one of the two legally obligated parents will not cancel the PLUS loan.
Other types of debt may be forgiven if the borrower dies with debt but has no assets that can be used to pay it off. In this case, the estate will be insolvent and the debt will be discharged.
5. Can debt collectors call the deceased person’s other family members?
Debt collectors demanding payments may contact the deceased person’s family members only under certain circumstances, and they’re not allowed to talk about the debt of the deceased person.
They can only contact a relative once to ask for information about the deceased person’s executor, surviving spouse, administrator, or any other person who is responsible for paying the deceased’s debt.
They’re allowed to get the number, address, and phone number only. The only exception that would permit them to get in touch with a relative for a second time is if they were provided with incorrect or incomplete information the first time around.
6. Can you stop a debt collector from contacting you?
You can expect to receive calls from various debt collectors if you know that your parents were deep in debt before they passed away. Even so, remember that whether you’re the executor of your parents’ estate or not, collectors cannot harass you or force you to pay off your parents’ loans using your own money.
Unless you’re a joint account holder or have co-signed the debt, you can only use the money from your parent’s estate to settle the debt. If you’re not obligated to pay debts and you don’t want the collectors to contact you again, talking to them about it over the phone may not be enough.
Send a certified letter by mail about your request. Don’t forget to pay for a return receipt so that you’ll have proof that the collector received your letter. Once that’s done, they can only contact you under specific circumstances, such as to confirm receipt of your letter or to inform you that they will take legal action to collect the debt.
Get in touch with the Federal Trade Commission if you have complaints against a debt collector. Debt and deceased relatives are complicated topics. You should consult an experienced attorney for assistance. You may also seek help from non-profit debt counselors, such as the NFCC.
Final Thoughts
If your parents died broke, you might be worried about being held responsible for their debts. Don’t fret. You will not inherit debt unless you sign a legal document stating that you’ll take on the responsibility of paying it off in the event of their passing. Your parents’ estate will be used to settle any outstanding debt balance and not your personal assets. In case the estate isn’t enough to cover the total debt, the court will determine which ones should be paid first. Creditors may have to take a loss since the remainder of the debt will be written off when the estate is insolvent.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
