The short answer: You typically won’t have to pay your parents' debt out of your own pockets unless you co-signed for that debt with your parent, you are a joint account owner with them, or you jointly owned property with them. Keep reading to learn more.
If you’re like the majority of Americans who can’t count on any sort of generational transfer of wealth, you might be afraid that the only thing your parents will leave you is debt. Don’t be too worried, though. Even if your parents die owing money, you likely won’t inherit their debts, unless you fall into one of a few exceptions. Here’s what you need to know about how debts are handled when someone dies.
Debts are paid from your parent’s estate
Unfortunately, debts don’t die when the person who owes them does. Debts are settled during a process that is called probate. Creditors have a certain period of time during the probate process to file claims for what is owed. Then, the estate of the person who died is responsible for paying those debts.
Assets and property that were in that person’s name are considered part of the estate. So if your parent dies with, say, money in a savings account and with debt, those savings will be used to pay off debts before any of that money can be passed onto heirs. Be aware that creditors can’t touch life insurance payouts as long as the beneficiary is a person (or people) rather than the estate. (This is an important reminder to ask your parents to make sure they’ve named beneficiaries on any life insurance policies they have.)
If you are the executor of your parent’s estate, it will be your job to notify your parent’s creditors and pay debts that are owed with assets that are in the estate. You’ll need to provide certified copies of your parent’s death certificate to the creditors. You also should contact the three credit bureaus—Equifax, Experian and TransUnion—to report your parent’s death so your parent’s credit reports reflect that he or she is deceased and new lines of credit can’t be taken out in his or her name.
If there aren’t enough assets in your parent’s estate to pay off everything that is owed, state law will determine which debts take priority. You won’t have to pay your parent’s debt out of your own pockets unless you fall into one of the exceptions.
When you could be responsible for a parent’s debt
To be clear, debts that are in your parent’s name only are debts the estate has to pay. According to the Consumer Financial Protection Bureau, you will be the hook for money owed only if these situations apply to you:
- You co-signed a loan with your parent. The loan becomes your responsibility when your parent dies.
- You are a joint account owner. If, for example, you and your parent were joint account owners of a credit card, you would have to pay off the balance after your parent’s death—even if you didn’t rack up the balance on the card.
- You jointly owned property with your parent, and state law requires that outstanding debts be paid out of property that was jointly owned.
Also, if you inherit property that your parent borrowed money to purchase, you will have to make payments on the loan to keep the property. For example, if your parent left a house with a mortgage to you, you would have to make the mortgage payments. Otherwise, the bank will foreclose on the property if payments aren’t made.
If you’re not sure whether you’re responsible for a debt your parent owed, contact an attorney with experience in consumer law or debt collection relief. The Consumer Financial Protection Board has information on finding an attorney for debt collection issues.