Do You Inherit Debt?
When a loved one passes, there are a lot of emotions and worries that come about. Between mourning your loss and putting together a costly funeral, it’s never an easy time. Another concern that pops into the equation is whether you are going to have to be responsible for your family member’s unpaid debts or not.
In most cases, family members aren’t responsible for directly paying their deceased loved one’s debts. However, there are cases where you may be liable. Here, we’ll discuss those exceptions and how you can avoid debt liability after a loved one passes. We’ll also talk about what creditors can and cannot do when attempting to claim unpaid debt.
In Most Cases, Debt Dies with the Debtor
As a general rule, when someone passes, their debt becomes the responsibility of their estate. It is usually the job of the executor or representative of the estate to pay off all necessary debts before they distribute assets to the beneficiaries listed in the grantor’s will or trust.
There are cases where an estate may not have enough assets to cover the debt. This is called an insolvent estate. Here’s what typically happens:
All available assets in the estate will go towards the debt
Any remaining debt won’t be completely paid
Heirs won’t be responsible for covering the rest
Heirs won’t receive assets since they all went towards paying the debt
When You May Be Responsible for Unpaid Debts
You Were Their Co-signer or Guarantor
When you cosign or guarantee someone, you aren’t just declaring financial responsibility if they are unable to pay a loan while they’re alive, but also after they pass.
You Jointly Held an Account with Them
You will be responsible for paying the debts of a bank account, credit card, or another account that you jointly shared with the person who passed. This does not apply to authorized users, just those holding joint ownership.
They Accumulated Debt in Your Marriage
If you were married to the person who passed, you may be responsible for covering the remainder of their debts. This is true even if the debt was solely in their name.
Spousal responsibility applies in community property states, which include California, Arizona, Nevada, Louisiana, New Mexico, Washington, Idaho, Texas, and Wisconsin.
You Co-Owned a Business with Them
If you were a partner or co-owner of a business with the deceased individual, you may be liable for all the business’s current and future debts. Whether or not you owe, however, depends on the business structure.
If there wasn’t a co-owner or partner involved, the deceased individual’s business debts will become part of their estate.
It Also Depends on the Type of Debt
Even if you weren’t the deceased individual’s cosigner, guarantor, spouse, business partner or co-owner - and didn’t share an account with them - you may not be off the hook just yet.
Whether or not you inherit a loved one’s debt will also depend on the types of debt they have. For example:
Mortgages: If you inherit a house, you will be responsible for any past-due or monthly mortgage payments going forward. If you decide to sell it, you might also owe a capital gains tax depending on the state where the home is located.
Credit Cards: If there isn’t a joint owner of the card, existing credit card debt will typically fall under the responsibility of the estate after the cardholder passes. If the estate is deemed insolvent, then the remainder of the debt will be written off.
Student Loans: Federal student loans dissolve after one’s passing. However, private or personal loans for education or other purposes will often become the responsibility of the estate to pay off.
How the Estate Pays Debts
When the estate is responsible for paying off certain debts, they will be paid off in this order:
Funeral and administrative expenses
Owed taxes
Secured debts (e.g., mortgages, auto loans, home equity loans)
Unsecured debts (e.g., credit cards, student loans, medical bills)
What Creditors Can and Cannot Do
Whether you’re the spouse, an heir, a business co-owner, or have another affiliation with the deceased person, it’s important to know your rights.
Creditors Can:
Contact you regarding the debt - including via phone, mail, email, text, etc.
Report unpaid debt to credit reporting agencies
Attempt to negotiate a settlement, usually for a lower amount
Send your debt to a debt collector
Sue you for owed debt
Creditors Cannot:
Harass you with repeated calls or other means of communication
Threaten your arrest or other legal consequences if you don’t pay
Dishonestly claim to be a lawyer, police officer, or government authority
Speak with third parties about your debt
Threaten to garnish your wages without court approval
Deny to verify your debt upon your request
Ask you to pay for debt that you’re not legally on the hook for
Break state or federal laws
Contact a probate attorney right away if you believe a creditor has violated your rights, if they sent you to a debt collector, or if they are suing you.
Avoiding Debt Liability
It may be too late to protect yourself from being liable for a deceased person’s debts. However, there are things you can do to prevent future liability:
Refrain from co-signing a loan with someone unless absolutely necessary
Consider being an authorized user instead of a joint owner on someone’s account
Limit your personal liability when co-owning or partnering with a business by opting for a certain business structure, like a Limited Liability Company (LLC)
You can also limit or reduce the amount of debt others may liable for after you pass:
Protect your assets with life insurance or a trust
Keep your business and personal assets separate
Be cautious when selecting a power of attorney as they will have responsibility over managing your finances
Consult an estate planning attorney for advice
Conclusion
The good news is that you likely won’t inherit a loved one’s debt. However, this depends on multiple circumstances, like whether you were married to them, cosigned a loan for them, jointly owned an account or business with them, and the like.
In the end, it’s best to work with a probate attorney to get a clear idea of whether or not you’re responsible for your deceased family member’s debt. They can also assist you in the event that a creditor is harassing you for payment or trying to get you to pay when it’s not your responsibility.
Contact us today to get expert probate or estate planning assistance.