Losing a loved one is never easy and surviving family members are often left with the logistics of planning a funeral, cleaning out a home, and writing an obituary. It’s also possible for someone to die with debt — which poses the question, “Can you inherit debt?” Knowing what debts are forgiven at death and which must be repaid by surviving family members can make this time of transition a little easier.
In most cases, debt isn’t inherited and is often settled by the estate or forgiven. However, there are a few exceptions when surviving family members may be left with debt. Let’s discuss what happens if someone dies with debt and how to help protect loved ones from debt collection.
How debt is handled when you die
Most debt isn’t inherited by someone else — instead, it passes to the estate.1 During probate, the executor of the estate typically pays off debts using the estate’s assets first, and then they distribute leftover funds according to the deceased’s will. However, some states may require that survivors be paid first.1 Generally, the only debts forgiven at death are federal student loans.2
Solvent vs. insolvent estate
If the estate has enough money to cover all debts and more, it’s considered solvent. But if it doesn’t have enough, it’s considered insolvent.3
If the estate is insolvent, creditors may forgive debts the estate can’t cover. If the estate is solvent, any money or property remaining after debts are distributed among beneficiaries.
While it can vary by state, most debts are settled in the following order when an estate is insolvent:4
- Estate taxes and legal fees
- Funeral and burial expenses
- Outstanding federal taxes
- Outstanding medical debt
- Outstanding property taxes
- Outstanding personal debt (credit card debt and personal loans)
With secured debts — like a mortgage or car loan — a lender may repossess the asset, or a surviving family member may be able to assume the debt through refinancing.4
Debt collection law
Debt collectors are held to the Fair Debt Collection Practices Act (FDCPA) and can’t harass surviving family members to pay debts they don’t owe. Instead, collectors have a designated amount of time to make a claim against the estate. After this time, creditors forfeit their right to repayment.5
Debt that may be inherited
So, do you inherit your parents’ debt? How about your spouse’s or child’s? It depends on the type of debt, what state you’re in, and whether the estate can cover it. There are still a few kinds of debt that may be inherited. These are generally shared debts, like co-signed loans, joint financial accounts, and spousal or parent debt in a community property state.4
If you inherit a house, car, or other type of property, you’re now responsible for all the debts that come with it. This could include a home equity loan, car loan, or mortgage.4
Debt from your parents
There are two types of debt you could inherit from your parents: loans you co-signed for them and medical debt (in certain states).3
Over half of U.S. states have filial responsibility laws, which say adult children may be responsible for their parents’ care expenses if they can’t support themselves. If your parents’ estate was insolvent and couldn’t cover all of their medical bills, you may be liable.3
Debt from your spouse
There are two kinds of debt that a surviving spouse may be responsible for: joint debt and community property debt.1
Joint debt, which the surviving spouse is now responsible for, could be a joint credit card, mortgage, or car payment. However, if you’re an authorized user of a credit card, not a joint owner, you aren’t responsible for debt repayment.1
If you live in a community property state and didn’t sign a prenuptial agreement, you may also be responsible for any debt your spouse took on during the marriage. Community property states include:4
- New Mexico
Debt from your child
Co-signed loans are generally the only kind of debt parents may be left with when a child dies. These may include student loans, car loans, or other personal loans. If the child was the primary borrower and they pass away, the co-signing parent may be required to repay the loan.
Assets that may be safe from debt collectors
Some assets are exempt from the probate process and are automatically distributed to beneficiaries when someone passes away. Life insurance policies and retirement accounts — e.g., 401(k) or Roth IRA accounts — can’t be claimed to pay off debts.4 Living trusts are another way to protect assets from being claimed to repay debt after death, since they usually skip the probate process.
Protect your loved ones
Having an estate plan can help keep your loved ones from encountering financial hardships after your death. There are a number of online resources that can help you begin the process. However, it’s a good idea to consult an estate planning attorney to ensure you understand and are in compliance with the inheritance laws in your state.