Losing a loved one can be a devastating experience, but it can become scary if you find out that one of your parents left a load of debt behind.
You might be wondering, am I required to foot the bill?
“In most cases, no,” says Crystal Rau, a certified financial planner at Beyond Balanced Financial Planning. “You really don't have to worry about inheriting parents’ debts, because the estate takes care of that.”
Let’s discuss how the estate process works and some situations in which you may be on the hook for your parents’ debts.
How Your Parents’ Debts Are Typically Paid
If your parents left a good amount of debt behind, chances are that they also left some assets.
Creditors have a certain amount of time to submit a claim for payment, and the time limit can vary by state.
For example, Indiana gives creditors three months. Kentucky allows them six months or two years, depending on if someone is appointed to represent the estate.
“If an estate is solvent, meaning there are assets within the estate that exceed any debts they have, their debt should be paid in full,” says Rau.
The order of payment of claims typically follows this order:
- Costs and expenses of administering the will
- Funeral expenses
- Debts and taxes
- All other claims
Depending on the type of assets your parents left behind, this process may require that the executor sell off some of the estate’s assets to pay the debts.
And if a creditor doesn’t submit a claim within the state’s allotted time frame, the debt is discharged.
If there aren’t enough assets to pay off what your parents owed, you’re usually not liable to pay it off out of your own pocket. It was their debt, and it dies with them.
There are, however, some exceptions to this rule.
When You Might Be Obligated to Pay Your Parents’ Debts
If you co-signed a loan with your parent, it’s your debt just as much as it is theirs, and you’re legally liable to repay the balance.
Depending on the situation and your state of residence, the rules can get complicated, and you may be required to pay other debts.
Here are the details to know for each major debt type.
An auto loan is a secured debt with the vehicle as collateral. As a result, the lender has the right to repossess the vehicle if the loan doesn’t get paid by the estate or some other way.
If your parent left you the vehicle in their will and you’d like to keep it, contact the lender and arrange to take over the monthly payments.
If not, however, you can disclaim the vehicle, and it will go to the next person in line or to the estate. At that point, the estate can sell the car to pay off the loan.
Unless you’re a co-signer or joint account holder on the credit card account, you’re not liable for any credit card debts your parent left behind.
Note that there’s a difference between these two account statuses and being an authorized user.
If you were an authorized user on your parents’ credit card, you had the right to use the card but were never liable for the debts you or they incurred.
Thirty states have filial responsibility laws that may require you to pay your parents’ medical bills if the estate doesn’t.
These states include: Alaska, Arkansas, California, Connecticut, Delaware, Georgia, Idaho, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Mississippi, Montana, Nevada, New Hampshire, New Jersey, North Carolina, North Dakota, Ohio, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Utah, Vermont, Virginia and West Virginia.
That said, Rau claims that enforcement of these laws is rare. “If they accrue those medical expenses, especially at the end, and have a large outstanding debt, it may be enforced in certain states,” she says.
But even then, she doesn’t hear about it often.
Many of the same rules apply to mortgage loans as to auto loans.
If your parents left their home to you or you jointly owned the property with them, the lender may require you to take over payments on the loan.
If you don’t want the house or the financial obligation, you can disclaim any rights you have to the house.
If there’s a secondary beneficiary, they will have the option to do the same. If all named beneficiaries disclaim the property, it goes to the estate, and the executor must determine how to pay the debt.
Again, this can happen using other assets in the estate, or the executor can sell the home to pay off the loan.
Because personal loans are typically unsecured, there’s no collateral that the lender can repossess to satisfy the debt.
As a result, you would only be on the hook for payments if you co-signed the loan with your parent.
Otherwise, the estate would be responsible for paying it.
If your parent had federal student loans when they died, they’ll be automatically discharged. This means that neither you nor the estate is responsible for paying them back.
If your parents borrowed through a private student loan company, however, it’s not as simple. While some private student loan companies discharge your debt upon death, others may require the estate to pay off the loan.
But again, you won’t be liable personally unless you’re named on the loan as a co-signer.
In addition to their other responsibilities, the executor of your parents’ will must also file a final tax return with the IRS.
If any taxes are owed, the IRS will put a lien on assets in the estate, meaning it has the right of possession of those assets until the debt has been paid.
This means that if the executor distributes assets to you that the IRS has placed a lien on, it agency can collect on it. It cannot, however, force you to pay the owed taxes from your personal funds.
State tax laws on the matter can vary by state, so be sure to speak with a tax professional to understand your next steps.
What to Do if a Debt Collector Calls You
“I've heard of credit card companies trying to reach out to the adult children saying, ‘Hey, you know, your dad owed this much on a credit card, and you're on the hook for that,’” says Rau. “But it's not true.”
Unless you’re the executor of your parents’ estate or co-signed a loan, creditors are legally barred from contacting you about an unpaid debt.
The only exception to this rule is that debt collectors can call you to get the contact information of the executor or co-signer. But they still can’t talk with you about the debt specifically.
That doesn’t mean some won’t try, though. If this happens, explain your rights and direct them to the executor or co-signer.
If a debt collector harasses you, makes false statements about your liability or violates your rights in any other way, you have recourse.
For example, you can sue them for damages.
You can also report them to your state’s attorney general’s office, the Federal Trade Commission and the Consumer Financial Protection Bureau.
Can a Creditor Sue Me for Repayment?
Whether or not you’re liable for your parents’ debts, creditors may try to collect by suing you for repayment.
Avoid taking this action as proof that you’re obligated to repay the debt.
Unless you’re the executor, a co-signer or otherwise legally liable, you don’t owe anything.
That said, don’t ignore a lawsuit.
To preserve your rights, the Federal Trade Commission recommends that you respond to the lawsuit by the required date, either on your own or through a lawyer.
While there are some situations in which you may be responsible for your parents’ debts after they die, they’re few and far between.
In almost every case, the estate is responsible for covering the debts. And if the estate’s assets run out before all debts are paid, creditors don’t have any other recourse.
Of course, there are exceptions to that rule, and they can vary by state.
Consider working with an estate attorney to make sure you understand who’s obligated to pay what.
If you cosigned a loan or owned property jointly with your parents, you’re clearly liable for the debt. Otherwise, avoid making any promises to your parents’ creditors if they come calling.
“If anybody's trying to push you into something that you're just not familiar with,” says Rau, “go talk to somebody before you do anything drastic.”
As you follow these guidelines, be sure to leave the settlement of your parents’ debts and estate to the executor.
By doing this you can rest assured knowing that you don’t have to worry about suffering financially because of their debt.