Can You Inherit Debt?: Do Children or Spouses Inherit a deceased loved one’s debt?
You are wondering whether you will be subject to the debts of a deceased spouse, parent, or loved one. Do you inherit debt? To answer your questions quickly: it depends on the relationship.
Children or family members: NO. Children and other family members do not inherit their parent’s or loved one’s debt.
Executors: NO. Executors do not inherit the debts of the decedent.
Spouses: Maybe. Spouses don’t inherit debts that aren’t joint, but they might inherit specific medical or caregiving debts.
Phew. Breathe a sigh of relief. Now, read more about what happens if your parents or loved ones have debt at their death and what happens to debt after death.
DISCLAIMER: Yes, I’m an attorney, but no, I’m not your attorney. This information is purely for education and information and is not legal advice. Nothing in this post is legal advice or constitutes an attorney-client relationship.
Death and Debts:
What I cover below:
- Who pays a decedent’s debts after death?
- Special treatment for spouses at death.
- What happens to debts on secured assets?
- What happens to debts on unsecured assets?
- How do creditors get paid?
- What if a decedent’s assets are insufficient to pay a decedent’s debts?
Children Are Not Expected to Pay Parent’s Debts
It is a huge relief to many parents and their children that children (or other beneficiaries) are not subject to the decedent’s debts at death.
A parent dying with significant credit card debts, unsecured loans, medical bills, or other debts does not have to worry about passing those debts on to his or her children.
In fact, pursuant to Federal law and the fair debt collection practices act, a debt collector has to inform beneficiaries that attempts to collect debts after death are not payable by the beneficiaries. (https://www.ftc.gov/legal-library/browse/rules/fair-debt-collection-practices-act-text)
And, any child asked to take on the burden of a parent’s debt simply by virtue of their death is not a proper request. No bank, credit card company, or other respectable lender can expect a child to pay his or her parent’s debts personally.
Let me be perfectly clear, however, this does not mean that all debts simply disappear. Now you need to know who does pay the debt if the children don’t have to.
Who is responsible for a Parent’s Debts after death
Children are not expected to pay their parents’ debts at death. But, a decedent’s estate is expected to pay debts. Debts become the property and liability of the parent’s estate.
What is an estate, and how is it valued?
An estate refers to all of the assets and liabilities that a person owns at his or her death. The pile of property and debts leftover after death comprise the decedent’s estate.
Like any good balance sheet, you might put your assets on one side and the liabilities on the other side of the estate. If mom and dad die with $100,000 in assets and only $5,000 in debts, then the estate’s value is $95,000.
The final expenses, bills, and debts are paid from the pile of property and assets left over at death.
If, on the other hand, the pile of assets only add up to $5,000 in assets and $100,000 in debts, then most of those debts are likely to be a complete loss for the lender.
The loss might grow even larger if mom or dad owed priority expenses like funeral bills, taxes, or medical expenses from their final illness.
Plus, there is the issue of priority expenses. Most states have laws that estates pay funeral homes before almost any other debt. Plus, taxes and medical expenses usually have to be paid before unsecured creditors.
What if the estate can’t pay?
In some cases, if the estate can’t pay, then the debt is simply a loss. However, in other very limited cases, a spouse is required to pay a dead spouse’s debts. Really it depends on the type of debt.
Of course, any debt that is joint between spouses (have both spouse’s names) will still become the responsibility of the surviving spouse. Joint ownership = joint debt.
However, if your spouse alone had unsecured debts like credit cards or personal loans, then spouses are not required to pay them.
The Doctrine of Necessity (Doctrine of Necessaries)
In one very limited case, common law requires that spouses do pay their dead spouse’s debts even if they aren’t joint.
The doctrine of necessity (doctrine of necessaries) requires surviving spouse’s to pay for some final medical debt and even long-term care expenses (like nursing home costs). Mostly this is limited only to unpaid bills associated with the deceased spouse’s care.
Under the doctrine of necessity, the law allows creditors to sue a surviving spouse for expenses that he or she would have been responsible for during the life of their departed spouse.
Of course, laws and practices vary by state. Indiana state law, for example allows a nursing home to sue a surviving spouse to pay a final nursing home bill. Further, hospitals have the right to collect against the surviving spouse for some medical debts after the spouse’s death.
And, of course, secured debt (like a car loan) would still follow the collateral (see unsecured debts below). Similarly, joint debts are still payable.
How do creditors (debt collectors) collect debts?
Before you just take your inheritance and assume that the creditors are out of luck or won’t notice, not so fast. Creditors are protected in the estate and probate process too.
Plus, savvy creditors know how to get paid.
If your estate is a probate estate (meaning an estate administered under court supervision), then creditors must be notified of the death. Then the court gives the creditors an opportunity to submit a claim.
RELATED POST: Why do I want to avoid probate?
If your estate is a non-probate estate, then the personal representative (estate executor) is responsible for paying off the debts before any of the beneficiaries receive their money out of the estate proceeds. The personal representative is subject to the same priority rules and regulations, but is never subject to the debts personally.
If the estate assets do not produce enough money to pay the final debts, then a probate court will apply a priority list for who gets paid first.
Order of priority for debt repayment under state laws:
- Priority expenses are paid first (medical bills, funeral expenses, taxes, etc.)
- Secured Debts
- Unsecured Debts
Secured vs. Unsecured Creditors
Secured creditors have more protection than unsecured creditors.
What happens to a mortgage or a lien at death? Well, it follows the asset. Unpaid debts on a secured asset are paid through the sale of the underlying asset.
Mortgages and liens are unique debts because they are secured. The underlying asset is collateral (security) for the pledge of repayment.
If a debtor leaves an unpaid debt on a house or real estate, then the bank can foreclose and take the house or property.
If a debtor fails to make payments on an auto loan, boat, or motorhome, then the bank can repossess the vehicle.
Therefore, even though the general rule is that a child is not required to pay his or her parent’s debt, he or she does receive an inheritance, assets, or other benefit subject to the debts.
Death and Garn St. Germain
This comes up regularly with the Garn St Germain act. (https://www.congress.gov/bill/97th-congress/house-bill/6267) While this act provided tremendous protections for surviving spouses and children, it does not forgive debt.
Instead, it ensures that banks don’t foreclose or create unfair loan terms. The debt still has to be paid up to the value of the underlying collateral.
Most importantly for spouses, the Garn St. Germain act prevents a bank from foreclosing on a home where the spouse becomes the owner at death even if the couple were not joint owners during life.
Sometimes children like to read the Garn St Germain act to prevent against foreclosure. Then, they believe that it also means that it forgives the associated debts.
This would be a mistake.
Only some very limited categories of debts are forgiven due to death, and mortgages are not one of them!
Instead, the Garn St Germain act allows the child or the beneficiary to continue to pay off the decedent’s debt in installments or pay it off entirely. It might even require that the lending institution allow an assignment.
Regardless of the type of property or the federal protections, children are still not required to pay the parents’ debts or even accept their inheritance. However, if a child (or other beneficiary) receives an inheritance including secured property, the debts come with it.
RELATED POST: What is disclaimer?
The debts follow the secured assets up to the entire value of the received gifts.
What happens to unsecured debts after death?
Unsecured outstanding debts, on the other hand, are a completely different story.
Unsecured debts are paid out of the residue (the remaining assets) of the estate. This means that they are paid last or nearly last from the leftovers.
Unsecured creditors include debts like credit card debt, personal loans with no collateral, expenses that weren’t paid before death like insurance claims, and more.
If, after payment of all final expenses and funeral bills, taxes, administrative expenses, and secured debts, the estate still has money left, then the unsecured creditors can get in line.
If the estate lacks enough assets to pay all unsecured debts, then the proceeds are prorated among the creditors.
Only after all priority expenses, secured creditors, and unsecured creditors are paid, do the children or other beneficiaries finally get their money!
Children do not inherit parents’ debts!
So, no, children do not inherit their parents’ debts and aren’t required to pay their parents’ bills out of their own pockets. However, the assets they do inherit are subject to creditor claims and other important laws.
Children are not required to dip into their own assets to pay their parents’ bills at death. But, they also cannot expect to receive heavily encumbered assets without satisfying the underlying bills.
In some cases, children may do better to walk away from an inheritance completely and not have to deal with the mess of debts associated with it.
In other cases, paying a few bills here and there may leave the children or beneficiaries with a lightly scathed inheritance.
Regardless, children and parents can rest easy knowing that creditors cannot chase after children after their death.
As always, you should always discuss your personal circumstances and debts with a reputable probate attorney in your jurisdiction.
To read more about debts and non-probate transfers, check this out.