The loss of a loved one is never an easy event, no matter how long you’ve prepared for it. But what happens when you are inheriting family debt?
As the age old adage says, only two things are certain in life: death and taxes. While death may be an inevitable fact, it brings about uncertainty. Not least of which is financial uncertainty. Especially when that sense of uncertainty is aggravated by debt.
According to CNBC, in 2021 consumer debt (all debt including mortgages) was at record levels—a figure that’s only expected to compound over time, according to credit reporting agency Experian, who estimates that close to 73 percent of Americans will die leaving some form of debt behind. And if your loved one is already facing mountains of debt upon passing, medical bills and legal fees are hardly going to provide any respite.
Luckily, there is some good news when it comes to inheriting family debt. In most cases you will not inherit debt from your loved one, but a parent’s debt may affect your inheritance.
Inheritance and Debt
Depending on the size of the debt, any estate left to you or other heirs may be affected. And often in adverse ways.
Typically, the responsibility of paying off a parent’s debt is subject to the decision of the executor of their estate, who is generally responsible for managing, filing and distributing an estate subject to both state and federal laws as well as the deceased’s final will. There’s no legal responsibility on behalf of a family member, spouse or other heirs to pay out of pocket for family debts. Depending on legal judgements or executor decisions, property left by a debtee may be legally seized in order to cover any remaining balance. This can include:
- Real estate property
- Bank accounts
- Individual assets including investment accounts, stocks, bonds and personal property in which there is no designated beneficiary
So, most of the time the estate is responsible for the deceased’s debts up to the value of all the assets, and no one is personally responsible for family debt.
Credit Card Debt
While you are in no way, shape or form obligated to pay out of pocket for any credit card debt a loved one may have incurred, it can still be legally subtracted from any financial assets left to you. Credit collection agencies are notorious for attempting to persuade surviving family members they’re personally responsible for paying off any unpaid balance. Do not be intimidated. Not only is this sort of heavy handed tactic distasteful; it’s illegal. Contact your Attorney State General’s office or the Consumer Federal Protection Bureau immediately if any agency attempts to do so.
In most instances, any outstanding medical debt will be covered by remaining assets in the deceased’s estate and must be paid off before the estate is distributed. However, there are currently almost 30 states in the U.S. which have instituted laws where facilities, providers and insurance companies can require children to financially cover (if only partially) a portion of unpaid medical bills if the estate has insufficient funds.
These include Alaska, Arkansas, California, Connecticut, Delaware, Georgia, 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.
In instances of death, lenders will typically not require an heir to pay off any outstanding mortgage balances immediately. However, because both federal and state laws can vary dramatically, they may require you to be responsible for future payments if insufficient funds remain in the estate under threat of property seizure.
If a mortgage is worth more than the actual value of the property itself, many lenders will agree to a short sale as it’s typically the most convenient option, and avoids a lengthy procedure process (which can sometimes take over nine months, depending on the state.) An heir can agree to foreclosure without having to pay any difference between a property’s sale price and any balance owed—and with no damage to their credit score (unless they were co-signers on a loan.)
An even more convenient option for many people is to arrange to sell the property privately on the market through a realtor or to a reputable home buying company to offset the balance.
Any unpaid taxes, both federal and state, are the direct responsibility of an estate and not an heir. However, tax agencies are given absolute priority over remaining assets in an estate; and in the case of federal estate tax, liens are common if property has been distributed prior to payment of due balance.
Common Instances of Inheriting Family Debt
- If you were the surviving co-signer of a loan taken out for a parent
- An outstanding bill of property remains for and real estate jointly owned between you and a parent
- If a home is jointly owned with right of survivorship, the survivor receives the home and takes responsibility for mortgage obligations. Federal law currently prohibits joint owners to pay off mortgage debt immediately following the death of a co-owner, however
- Lenders can legally require the inheritor of an estate to pay off home equity loans. More often than not, those amounts may frequently involve the sale of any property covered.
Life Insurance Benefits
Since life insurance is generally protected from creditors, life insurance benefits are typically not considered part of a probated estate so long as the deceased completed a designated beneficiary form.
Term Life Insurance Policies
Term life insurance policies provide a death benefit for a set number of years, are well suited for many people looking for an alternative to traditional life insurance policies; with an additional bonus of being more cost effective, as well.
Likewise, if at least one designated beneficiary survives the deceased, a retirement account will pass directly to that person outside of probate.
The pain of grief is a universal burden; but one we all endure and interact with in unique ways. The process of losing a loved one is painful enough; but when it comes to arranging final details, you don’t want any unexpected surprises. It’s better to accept (and cooperate with) a loved one’s final wishes than to put too much strain on their end of days. But it’s also better to be prepared for necessary legal requirements. There’s no reason why you shouldn’t be able to cooperate with both.