Death is not a sunny topic to think about, but if you’ve ever wondered what happens to debt when you die, or when someone close to you dies, this guest post by Andy Masaki about debt inheritance is an important read.
Debt inheritance is definitely a nuanced topic depending on where in the United States, or elsewhere, you live.
We recommend researching beyond this article, which is intended to provide general information about what happens to your debt when you die, to find more specific answers to questions like what happens to credit card debt when you die.
Here’s a bit more about Andy Masaki:
This article is written and contributed by Andy Masaki, who is associated with Oak View Law Group as a financial advisor and blogger. Hope you find this article on parental debt useful. Happy reading!
If you’re interested in writing a guest post for The Money Mix, check out our guest post guidelines.
Note: The Money Mix hosts guest posts as a way to further diversify and amplify the personal finance community. We don’t agree with everything written in our guest posts, nor do we endorse the author or ideas expressed in the post.
Do you need to take care of your parent’s debts after they die?
What happens when your parents die, leaving behind debts?
Is it you who needs to take care of those debts, or is there some other way those debts can be managed?
If you are here, reading this post, then I must assume there are high chances you are either hit by a big loss of a very close family member, or you are pretty worried about what can happen in the future!
If you are going through the mourning phase of your parent’s death, then my condolences are with you.
Or, if you are here to straighten up the future debt situation, then I will try my best to share with you the correct information regarding your queries.
My sentences are long, but I can’t help it! This topic deals with “Death” and “Debt”! Both are very hard to explain in short phrases!
So, let’s discuss whether or not it’s possible for you to inherit your parent’s debts after their death.
Have you co-signed and co-borrowed any loan, or debt with your parents?
This is the real factor that can actually bind you into an obligation to pay off any debt your parents have left behind!
If a debt is co-borrowed or co-signed, then on the demise of any one borrower, the other becomes responsible to pay off the debt.
There’s definitely nothing you can do to evade a debt you are a co-borrower of.
But, this is not applicable to any credit card debt of your parent, for which you are only an authorized user.
There’s a big difference between co-signing and becoming an authorized user of a credit card.
Guess you already understand that.
With co-signing, you become an equal owner of the debt along with the other signer.
But if you become an authorized user, then the primary owner of the debt ensures you can also use the credit line for your own purposes, but you are not responsible for the debt!
With this said, you can’t escape debt liability for any debt that you co-signed with your parents, be it mortgage, credit cards, personal loan, or anything!
The next issue is…
Can creditors or lenders take hold of the deceased’s property, to compensate due debts?
This part completely depends on the cases of Testacy, Intestacy, Probate and Non-probate asset analysis.
This portion is critical and important in the sense that even if you don’t inherit debts from your parents, any property that you inherit upon your parent’s death can still be accessed by creditors and collectors.
There are two situations for divisions of the property when someone dies. These are Testacy and Intestacy.
Testacy takes place when the deceased has made a valid and legal ‘will’ for the distribution of properties and assets after his death.
If the ‘will’ commands that all properties held by your parent shall be passed onto you upon his death, then the creditors will have no access to such properties, as it is now solely yours!
After death, a probate will be held in court and the properties will get disbursed per the instructions in the will.
But the thing is different when it comes to mortgages and other security backed loans!
If the loan is not repaid, and the property gets passed onto you, then you are liable to make the payments as usual, as it was being done by the deceased.
So, if your parent makes a will in your name and dies, then you will get the properties and retain the ownership.
However, if your parent dies without making a ‘will’, or if he dies intestate, then the properties will first go through an ‘estate creation,’ where an executor for the estate will be chosen by the court.
This executor will sell off assets and properties to reimburse unpaid debts.
The creditors will get back the due amounts, and property that’s left after paying off debts will be distributed among family members as per the respective state laws of inheritance.
What can the creditors do to joint accounts or properties that you own directly after your parent’s death?
When your parent dies, any property you held jointly with your parent gets transferred to you, where the creditors won’t be able to access the property, whether joint savings accounts or any other property.
The same applies to Pay On Death accounts, if your parent signed your name in ‘to pay on death’.
Hence, it is impossible for creditors to lay hands on any property that becomes yours upon your parent’s death.
It is also highly unethical and impossible for them to enforce debts on you that you never jointly owned!
Still, if you are worried about parental debt, here are some things you can do:
If you have co-signed any debt with your parents, and are scared that such debts will pass onto you after they die, then you should do your best to prepare to have sufficient income to cover any additional expenses.
It’s also worthwhile to have and follow a sustainable budget focused on debt reduction that could sustain a sudden increase in liabilities.
For more details, consult a lawyer and get a vivid explanation of your situation relevant to your location.