Disclaimer: We are not qualified legal or tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.
Losing a loved one brings not only grief but also a host of financial worries, one of the most pressing being the question of inherited debt.
In the midst of mourning, understanding the complexities of debt inheritance is crucial.
This guide aims to explore the process, providing clarity on what debts may or may not become your responsibility.
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The Steps to Prove a Will
When someone dies, they will either have a will (or an estate) or they will die intestate (without a will). Within the will or estate, someone will be named as executor. If there is no will, you can petition the probate court to be named executor. Once this is in place, the executor must notify all creditors of the death. There will be a set period for the creditors to respond - this is set by the state of residence-- usually between two and six months.
The executor needs to make a list of all assets and values as well as a list of all debts. The executor must then pay off all debts. If some of the assets need to be sold to cover bills, the executor takes care of that.
Once all debts are taken care of, the provisions in the will are then followed as closely as possible. If the person dies intestate, any assets are divided up based on a formula set by each state.
Always have a will. It makes your survivors’ lives much simpler.
If you skip paying off debts, creditors may come after spouses, children, or other family members. You are generally not responsible for debt that you did not co-sign. The one exception is tax debts from the IRS which can (and will) file liens against inherited assets. This means that you, the heir, must pay out of your inheritance.
Untouchable Assets
If the deceased owned an asset like a life insurance policy, the named beneficiary receives the money immediately and it can not be touched to pay bills. If you want to make assets more untouchable, talk with an estate planner.
Mortgage Debt
Regardless of what category the deceased person falls into, mortgage debt can be a huge headache and is a great reason to talk with a lawyer.
If a parent dies, the mortgage can not call the debt. You may take over mortgage payments. If the mortgage is more than the house is worth, you can request a short sale or foreclosure. The house can also be sold and the income goes into the cash assets of the estate and is distributed through the will’s provisions.
Debt From Your Parents
The death of a parent does not necessarily mean you are inheriting debt. If you are not a co-signer on a loan, the estate is responsible for the debt. Of course, paying off the debt may leave you with no inheritance.
If you are a co-signer, the debt then transfers to you without payment from the estate.
Medicaid payments are the biggest issue faced when parents die. Depending on the decreased state of residence, the state can place a lien on the home, with some exceptions, to recover any payments made through Medicaid from age 55 to death. You can not be forced to pay these Medicaid bills and the state cannot come after a surviving spouse.
Hospital and nursing home bills can create a HUGE issue and is one place that you may inherit debt from your parents. If you live in 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, or West Virginia, you can be required to pay for your parent’s unpaid debts from hospitals or nursing home. The nursing home/hospital will go through the estate but can collect from surviving children.
This is an important situation to discuss with parents and estate planners before your parents need long-term care.
Debt from a Spouse
In general, if you and your spouse have co-signed on a loan, you are immediately responsible for the loan. The sticky part comes if you live in a
community property state including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Three states-- Alaska, South Dakota, and Tennessee-- allow married couples to opt into community property rules.
If you live or opt into a community property state, you are responsible, with few exceptions, debt in one spouse’s name is the responsibility of the surviving spouse. There are exceptions such as debt acquired before marriage and business debt, so contact an estate lawyer to have the issue clarified before you take on your deceased spouse’s debt.
Debt from a Business
If you are interested in purchasing a business that has debt, build the responsibility for the debt into the sales contract. You can absorb the debt, the old owner can take the debt with them or you can split responsibility for the debt. If the old owner retains ownership of the debt, the debt is not yours on their death.
Should You Have a Will?
The most important action you can take to help your children or spouse is to have a will set up. Your children or surviving spouse will have more protections and you can plan for long-term care and your debts.
Wills do not need to be fancy, they just need to be written up and witnessed. Dying intestate creates a lot of headaches for your heirs.
State-by-State Differences in Inherited Debt
The debts you inherit and your responsibilities towards a deceased person's debts often depend on the state you live in.
Here is a brief overview of some key state-level differences:
Filial Responsibility Laws
Over 20 states have filial responsibility laws that require adult children to pay for a deceased parent's unpaid nursing home or medical bills. These states include Alaska, Arkansas, California, and more.
**Recommend consulting an attorney if you live in one of these states and your parent had unpaid nursing home/medical debts.**
Medicaid Estate Recovery
Medicaid features state-level differences in estate recovery after a Medicaid recipient dies. Some states only place liens or claim assets from the estates of deceased recipients age 55+ at the time of death. Others recover assets for any Medicaid benefits paid out after age 55. The home may or may not be exempt.
**Consult your state Medicaid office to understand the policy where your parents lived.**
Community Property State Rules
If you live in one of the 9 community property states - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin - you may inherit debt due to state laws regarding shared spousal assets and liabilities.
Under community property laws, any debt incurred during the marriage is considered jointly owned by both spouses, regardless of who acquired the debt. This means that when a spouse dies, the surviving spouse retains ownership and responsibility for debts under the deceased spouse's name.
The same generally applies to assets - a surviving spouse retains equal ownership rights over assets like bank accounts, retirement investments, and real estate that was acquired during the marriage.
What types of debts are inherited?
- Credit card accounts opened during the marriage
- Auto loans and personal loans taken out jointly or by a deceased spouse only
- Medical debts incurred by the deceased spouse
- Federal student loans taken out by the deceased spouse
- Mortgages and equity loans on community property
What debts do NOT transfer?
- Debts acquired by deceased spouse before marriage
- Debts related to deceased spouse's separate property
- Debts related to small businesses owned only by the deceased spouse
Recommend consulting an estate planning attorney to understand how community property laws apply to your specific debts and assets before assuming responsibility for a deceased spouse's debts.
There are some exceptions and nuances state-by-state that an attorney can clarify regarding time limits, types of eligible debts, separate property classification rules, and more.
Checklist for Handling Inherited Debt
Losing a spouse or parent opens the door to expensive and stressful inherited debts.
1. Notify Creditors
Within 30 days of death, send creditors death certificate copies and written notice. Stop making payments from the deceased’s bank accounts.
Required for:
- Credit cards
- Personal/auto loans
- Mortgages
- Utilities
2. Understand Your State’s Laws
- Research filial responsibility laws requiring children to pay parents’ bills.
- Review Medicaid estate recovery policies regarding assets claimed after death.
- If in a community property state, clarify debts you now share with the deceased spouse.
3. Work With Estate Attorney
The attorney assists in resolving debts through the probate court overseeing the estate.
- Names your executor in will or files for court-appointed executor-ship
- Creates creditor claim timeline
- Notifies you which debts you now owe as co-signer
- Sells assets to cover valid creditor claims
- Distribute any remaining assets
4. Pay/Settle Debts You Are Responsible For
As a co-signer, you owe:
- Joint credit card accounts
- Car/personal loans co-signed
- Potential medical/Nursing home bills (depends on state law)
- Federal student loans
Debt settlement may lower total repayment.
5. Make Claims on The Estate
If you pay debts on behalf of the deceased from personal funds, submit claims to the estate for reimbursement.
6. Deal with Unaffordable Inherited Debt
Explore all options if inherited debt payments are unaffordable:
- Debt consolidation
- Hardship programs
- Negotiated settlements
- Bankruptcy
Meeting with a credit counselor or debt specialist can help weigh the optimal path forward to resolve debts, protect assets, and minimize damage to your financial life.
Comparing Options for Unaffordable Inherited Debt
If you inherit overwhelming debts that you cannot realistically pay off.
Explore options like:
- Debt consolidation loan – Combines debts into one lower payment. Watch for higher total interest costs over the loan repayment period.
- Hardship programs – For medical/credit card bills. Show financial difficulty to qualify for reduced/delayed payments.
- Negotiated settlements – Work with creditors to settle debts for less than originally owed. Typically save 40-60%.
- Bankruptcy – Court proceeding eliminating eligible debts or repaying a small percentage over 3-5 years. It has an impact on credit history.
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