Losing a loved one is hard enough. Roughly 73% of Americans are likely to die with at least some debt,¹ and losing a loved one can be worse if you’re worried about whether you’ll inherit their debt.
Fortunately, you won’t inherit someone else’s debt in most cases. When a person dies in the United States, the person’s 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 address this proactively for yourself and your loved ones.
Settling insolvent estates
When the assets in their estate can cover the deceased person’s debt, the estate is called a solvent estate. If the debt isn’t covered, their estate is referred to as an insolvent estate.
If your loved one’s estate is insolvent, the government uses a particular order of priorities to handle the remaining debt. Here’s the order in which they address these priorities:
- Any fees for lawyers, estate taxes, or trustees
- The costs associated with a funeral and any other proceedings related to the person’s passing (cremation, burial, etc.)
- Family allowances (financial support for the deceased person’s spouse and children, which takes effect before the estate gets distributed)
- Any unpaid federal taxes
- Any unpaid medical expenses that aren’t covered by insurance
- Any unpaid property taxes
- Any remaining personal loans and credit cards
What types of debt can be inherited?
Generally, four types of debt can be inherited: home loans on inherited property, joint debt, medical debt, and credit card debt.
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 the best route may be 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.
It’s sometimes possible to inherit medical debt if the estate is insolvent. In 30 states, the laws may require children to cover their parents’ medical bills if the estate doesn’t. Such laws are called filial responsibility laws.²
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, the debt is the state’s responsibility and won’t be inherited.
Note that being an authorized user on someone’s credit card doesn’t make you responsible for their credit card debt if they die.
If you’re married and your spouse passes away, as the surviving spouse, you may be responsible for joint debts during your marriage. This debt would fall under community property law. Some exceptions include gifts to each other and premarital property and debt.
In community property states, the surviving spouse is responsible for repaying their spouse’s debts acquired during the marriage – even if the debt is in their deceased spouse’s name alone. So, for example, if your late spouse has a lot of credit card debt under their name only, you would be responsible for that unpaid debt in a community property state.
Community property states
As mentioned above, some states have community property laws and are known as community property states. Currently, these states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These laws apply to domestic partners in Washington, Nevada, and California.³
It’s important to understand 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.
Nonprobate assets: protected from debt collectors
Some assets aren’t considered part of a person’s estate because they’re legally not allowed to be. If you inherit one of these, they can’t be used to pay off outstanding debts, and debt collectors can’t access them (unless that’s what you choose).
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 also can protect your assets from creditors and, in some cases, reduce taxes.
If a loved one names you as a beneficiary on their life insurance and passes away, that money can’t be touched by debt collectors or anyone else.
Similarly, if you’re a beneficiary on someone’s Individual Retirement Account (IRA), 401(k), or another type of investment account, that money also 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 be very stressful in the aftermath of a loved one’s death. However, some tools are available to help.
Understand your legal rights
Keep in mind that secured debts – ones backed by some kind of collateral, such as car loans and mortgages – are usually not your responsibility. The one exception is if you jointly held them or co-signed with the deceased person.
Unfortunately, sometimes collection agencies aren’t as forthright as you’d hope. To help protect yourself, find an expert to give you legal advice before paying anything. Talk to a credit counselor or a lawyer about your responsibilities before making any promises to creditors or debt collectors.
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 your obligations may be.
If you are the executor and aren’t sure what to do, getting legal expertise as soon as possible could be even more important. Free or low-cost legal services may be available if legal costs feel overwhelming.
How to prevent passing your debt down
Being on top of your finances is the best thing you can do to prevent passing down debt to your loved ones. Working to improve your financial situation, especially paying down your debts and engaging in estate planning, is crucial. Ideally, your assets will cover your debts and any joint accounts you have in the event of your passing.
Pay close attention to the open joint accounts and any debt you’ve co-signed. 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. Consider how this debt could impact your finances, like inheriting a house that’s not paid off yet.
What happens to a deceased person's debt?
When a person dies, their debt doesn’t go away — but typically, their loved ones don’t have to pay it either. If the person’s estate can cover the costs of their debt, available funds and 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 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?
Unfortunately not. However, if the person’s estate doesn’t cover the debt 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 debt to be paid by the surviving spouse should the other pass away.
Know your standing on loved ones' debt
Typically, when someone dies, 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 may be responsible for paying 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. Start preparing for the unexpected when you open a Chime High-Yield Savings Account.