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Can You Inherit Debt?

Jessica Martel • April 11, 2024

Losing a loved one and inheriting debt

Losing a loved one is hard enough without having to worry about whether you’ll inherit their debt. A recent report from Policygenius found nearly half of Americans worry they will pass their debt on to their loved ones if they were to die today.¹

So, can you inherit debt from a loved one? It depends.

When someone passes away in the U.S., their estate often covers any outstanding debts. In situations where that isn’t the case, inheriting debt is possible. With the right knowledge and planning, you can plan proactively for yourself and your loved ones.

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Solvent vs. insolvent estates explained

When the assets in an estate can cover the deceased person’s debt, this is known as a “solvent estate.” Examples of estate assets can include bank accounts, real estate, jewelry, furniture, or investments.

If the estate’s assets don’t cover the debt, this is called an “insolvent estate.” With an insolvent estate, state governments assign a particular order of priorities to handle the remaining debt. The order can vary between states. For instance, here’s the order in which payments are addressed in Washington State:²

  1. Cost of estate administration (any filing fees, fees for lawyers or trustees, etc.)
  2. The costs associated with a funeral and any other proceedings related to the person’s passing (cremation, burial, etc.)
  3. The expense of the last illness (medical bills, hospital bills)
  4. Wages due for labor performed
  5. Debts with preference under federal law (federal taxes, estate taxes)
  6. State debts and taxes (property taxes, business taxes)
  7. Judgements against the deceased (lien on real estate)
  8. Any remaining unsecured debt, including personal loans and credit cards

To recoup payment for secured debts, like a mortgage or car loan, creditors may seize and sell the deceased’s home or car.

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What types of debt can be inherited?

There are certain types of debt that you’re more likely to inherit, including joint credit card debt or medical debt. However, different states have different rules when it comes to who can inherit different types of debt.

Community property

In community property states, the surviving spouse is responsible for repaying debts acquired by their spouse during the marriage – even if the debt is in their deceased spouse’s name alone. This debt falls under community property law. Some exceptions include gifts to each other and premarital property and debt.

For example, in a community property state, you are responsible for your late spouse’s credit card debt, even if it’s only under their name.

These states include Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.3

Consider reviewing these laws if you live in one of these states. It’s also beneficial to have money-related conversations with your partner so neither of you finds yourself in a compromising financial situation should a worst-case scenario happen.

Mortgages and home equity loans

If you inherit a house with an existing mortgage, you’re responsible for loan payments as the new owner. It’s often possible to refinance the home, but you may choose to sell.

Co-signed and joint debt

If you’re a co-signer on a loan or have some other form of joint debt, and the other person passes away, you may be responsible for the remaining debt. Your obligation depends on whether their estate covers it and can vary depending on where you live.

For instance, if you co-sign a loan for a family member, and they pass away, you become responsible for the debt. Similarly, if you share a joint credit card or are a joint bank account holder, you are responsible for paying off any debt if they pass.³

A co-signer is different than an authorized user. While a co-signer shares joint responsibility for the debt, authorized users generally do not.

Medical debt

It’s possible to inherit medical debt if the estate is insolvent. For instance, if you live in a community property state, you may have to pay for your deceased spouse’s medical debts.

If your parent has passed away, you may have some responsibility for their debt if you live in a state with filial responsibility laws.

Filial responsibility laws hold adult children responsible for paying for the necessities of their poor parents.⁴ However, many states stopped enforcing filial responsibility with the implementation of Medicaid, as it often covers these bills.⁵

Credit card debt

Similar to medical debt, you can also inherit credit card debts depending on where you live and if you hold a joint account with someone who’s passed away.

If the credit cards in question are only in the deceased’s name, and you don’t live in a community property state, the debt may go unpaid.³

Debt from your children

If your child passes away, you are typically not responsible for their debt unless you’ve co-signed a loan or hold a joint credit card.

For instance, if you co-signed a student loan with your child, you may have to pay the outstanding debt balance.

Most federal student loans are discharged if you can provide proof of death. Generally, the borrower’s family is not responsible for the student loan repayments.⁵

Non-probate assets: protected from debt collectors

Some assets aren’t considered part of a person’s estate for legal reasons. If you inherit one of the following assets, you don’t have to use them to pay off outstanding debts, and debt collectors can’t access them (unless that’s what you choose).

Living trusts

A living trust is like a will, but it doesn’t have to go through probate court (which can be a hassle for your loved ones) after someone dies. Living trusts also have some additional features: flexibility and convenience for you and your heirs. Living trusts can also protect your assets from creditors and, in some cases, minimize taxes.⁶

Life insurance

If a loved one names you as a designated beneficiary in a life insurance policy before passing away, debt collectors can not touch this money, nor can anyone else.

Retirement accounts

Similarly, if you’re a beneficiary on someone’s Individual Retirement Account (IRA), 401(k), or another type of investment account, that money goes directly to you and isn’t accessible to creditors.

What to do if you inherit debt

So, what if the worst happens and you find yourself inheriting debt? This can feel stressful in the aftermath of a loved one’s death. To protect yourself, ensure you know what debt collectors can and can’t do.

The Fair Debt Collection Practices Act

The Fair Debt Collection Practices Act (FDCPA) outlines rules about who debt collectors can contact and when they can contact you.⁶ It also details what information collectors must provide if they call.

According to the FDCPA, it’s illegal for collectors to come at you in an abusive or deceiving way. If you think a debt collector is acting aggressively, you can report them to your state attorney general.

Before you pay for anything, consider seeking expert legal advice. Talk to a credit counselor or a lawyer about your responsibilities.

If you aren’t the executor of the estate, reach out to the person who is. They may better understand whether the estate is solvent or insolvent and what you are obligated to do.

If you are the executor and aren’t sure what to do, getting legal advice is a good first step. Free or low-cost legal services are often available if legal costs feel overwhelming.

How to prevent passing your debt down

Being on top of your personal finances is one way to prevent passing debt to your loved ones. Concentrate on paying down your debts and engaging in estate planning. Ideally, your assets will cover your debts and any joint accounts you have when you pass.

Pay particular attention to open joint accounts and any debt you’ve co-signed, and prioritize paying off outstanding debts earlier than later.

It’s also helpful to understand the financial health and estate plans of your loved ones. If you know there is a risk of debt inheritance, see what you can do to help them improve their finances.

Know your standing on loved ones' debt

Typically, when someone passes away, their debts are settled in a probate process that allows creditors and debt collectors to collect debts using the person’s estate.

If there isn’t enough money in the estate, the debt either goes uncollected, or a family member might have to pay for it. If the latter is true, it’s typically because of state laws, inherited property with a mortgage, or jointly held debt with the deceased person.

Knowing when and how you can inherit debt is helpful for managing your finances. Learn how to create a financial plan to make sure you’re ready for any obstacles that life may throw your way.

FAQs

What happens to a deceased person's debt?

When a person dies, their debt doesn’t go away, but often, their loved ones don’t have to pay it. If the person’s estate can cover the costs of their debt, available funds and the remaining assets in their estate will pay the debts. If not, the debt may go unpaid. If they had joint debt with another person (or in other exceptions), family members may have to pay some of the debt.

Am I going to inherit my parents' debt?

If your parents die and their estate covers their outstanding debts, you won’t inherit debt. If their estate falls short, you could possibly inherit debt. For example, this can happen if you inherit property from them that hasn’t been paid off yet. If you live in a state with filial responsibility laws, you may need to pay debts associated with your late parent’s medical care.

Is any debt automatically forgiven after you die?

Most federal student loans are discharged if you can provide proof of death. For other debts, if the person’s estate doesn’t cover it and there’s no one responsible for paying it off after they die, debt collection isn’t likely to occur.

In what states can you inherit debt?

Technically, it’s possible to inherit debt in any state in cases where the deceased person’s estate doesn’t fully cover their debts. In community property states like Arizona and California, there are explicit laws governing joint debt to married couples. These laws require the surviving spouse to pay the debts of their deceased partner.

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¹ Information from Policygenius "46% of Americans expect to pass on debt to their loved ones when they die" as of March 29, 2024: https://www.policygenius.com/life-insurance/2024-financial-planning-survey-passing-on-debt-after-death/

² Information from Washington State Probate's "An insolvent estate" as of April 3, 2024: https://www.wa-probate.com/establishing-estate/insolvent-estate-procedure/

³ Information from the Consumer Financial Protection Bureau's " Does a person's debt go away when they die?" as of March 31, 2024: https://www.consumerfinance.gov/ask-cfpb/does-a-persons-debt-go-away-when-they-die-en-1463/

⁴ Information from Mass Mutual's "Are you liable for your parent's nursing home bills?" as of March 31, 2024: https://blog.massmutual.com/planning/nursing-home-bills

⁵ Information from Federal Student Aid's "What happens to a loan if the borrower dies?" as of March 31, 2024: https://studentaid.gov/help-center/answers/article/what-happens-if-borrower-dies

⁶ Information from National Council on Aging's "Living trust vs. will: Key differences" as of April 3, 2024: https://www.ncoa.org/adviser/estate-planning/living-trust-vs-will/

⁷ Information from the Federal Trade Commission's "Debt and Deceased Relatives" as of March 31, 2024: https://consumer.ftc.gov/articles/debts-and-deceased-relatives#whoisresponsible

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