We live in an economy that makes debt virtually inescapable. Auto loans, mortgages, student loans, and credit cards can eat you alive… and follow you into death.
But can another person’s debt follow you as well? Inherited debt is a real concept, so it’s important to know whether you’re at risk of taking responsibility for your parents’ or spouse’s debts after they die.
What Happens When Someone Dies With Debt?
Unfortunately, debt doesn’t disappear when your time on Earth comes to an end. Instead, all of your debts and assets must be handled through a process called probate. During probate, your assets like bank accounts and real estate are used to pay off your remaining debts.
If your assets can’t cover your debts, then most creditors have no way to collect the money and they’re simply out of luck. If your assets are valuable enough to pay off all debts and still have money leftover, your loved ones receive the rest. Life insurance policies help ensure there’s more than enough money available to satisfy debts and still leave gifts for beneficiaries designated in the Final Will and Testament.
Which Debts Can Be Inherited?
If your spouse or parent recently passed away, and their assets couldn’t cover all of the debts owed after death, you may be on the hook for repaying those debts on their behalf. The following situations summarize the most common causes of inherited debt.
1. Mortgage debt if you’re a joint homeowner with the deceased person or if you inherited the home with the mortgage debt. The good news here, at least, is that federal law forbids mortgage lenders from forcing joint owners and beneficiaries to pay off the mortgage immediately. You can continue to make normal monthly payments or apply for certain types of mortgage relief if you can’t handle the mortgage costs on your own.
2. Credit card debt if you’re a joint account holder with the decedent. Simply being listed as an authorized user won’t cause you to inherit credit card debt, but the unpaid bills do become your problem if you’re a formal joint account holder.
3. Auto loan debt if you co-signed the loan. For example, if you helped your father buy a new car by co-signing the loan with him, you’re responsible for the remaining payments if he passes away before the vehicle is paid off. Failure to pay would lead to repossession.
4. Any debt accumulated by your spouse during marriage in community property states, which include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. In community property states, spouses are automatically responsible for the debts their spouses leave behind when they die.
What To Do If You’ve Inherited Debt
Tackling your own debt is hard enough; how can you possibly handle inherited debt as well?
First, check your loved one’s life insurance policy information. Life insurance is protected from creditors. If your loved one knew you’d likely be responsible for his debts after he died, he may have named you as the beneficiary of his life insurance payout to ensure you’re financially protected.
Second, check your loved one’s retirement accounts. These are also typically protected from creditors, so if you’re listed as a beneficiary, you can use those funds as needed to payoff inherited debt or supplement your income as you make additional monthly payments.
Third, talk to a lawyer and keep meticulous notes. Debt collectors will try to take advantage of you, and only an estate attorney can advise you of your rights and help you navigate the complicated process of inherited debt.