In most cases, you won’t inherit debt from your parents when they die. However, if you had a joint account with a parent or you cosigned a loan with them, then you would be responsible for any debt remaining on that specific account.
When a parent dies, their estate is responsible for paying their debts. This happens during the probate process. Probate is when the Lawyer or executor of the estate pays its debts using the estate’s assets and distributes what is remaining to that decedent’s heirs.
Creditors must make their payment claim to the Lawyer or executor within a certain timeframe, which is determined by law.
What pays the debts of a deceased person?
Only certain assets, known as probate assets, are used to pay an estate’s debts. There are also non-probate assets that go directly to a decedent’s heirs and aren’t used to pay debts.
Probate and non-probate assets.
Probate assets are assets that are only in the name of the decedent, such as the decedent’s bank account, car, or personal property. These assets must go through the probate process, where they can be used to pay debts. The laws regarding what are considered non-probate assets vary but common examples include:
- Joint brokerage accounts or bank accounts
- Bank accounts or brokerage accounts with a payable-on-death or transferable-on-death beneficiary designated
- Retirement accounts
- Life insurance accounts
- Assets held in a trust
- Since non-probate assets don’t go through the probate process, they generally aren’t used to pay debts.
What if someone who dies with debt only leaves behind non-probate assets?
In this situation, creditors can file a claim to have the debts repaid from non-probate assets. Whether they’ll take the time to do that depends in large part on the amount of the debt.
What happens when a person’s estate can’t pay their debt?
When an estate doesn’t have enough assets to repay all of a deceased person’s debt, then that estate is considered insolvent. Any probate assets of an insolvent estate must be used to repay as much debt as possible, and the remainder of the debt is usually written off.
One important thing to note is that if a secured debt, such as a mortgage or auto loan, isn’t repaid, the creditor can seize the asset tied to the debt. If the heirs to the estate want to keep that asset, they must continue making the payments on it.
How is it decided which debts get paid when there aren’t enough assets to cover everything?
The law determines the payment order. Here’s a standard payment order:
- Fees, including payment to the executor or Lawyer and the estate’s taxes, come first.
- Burial and funeral costs are paid second.
- Family members who depended on the decedent for their living expenses will then receive an allowance.
- Taxes are paid next.
- After Taxes, the estate pays property taxes and medical bills that weren’t covered by insurance.
- Unsecured personal debt, such as credit cards and personal loans, usually rank at the bottom in terms of payment priority.
Inheriting debt doesn’t happen often.
Despite the worries people have about inheriting debt, it’s a rare occurrence. A parent’s debt could reduce your inheritance, since assets from the estate may be used to pay back creditors. But you’ll almost never need to break out your own checkbook to resolve debt after a parent dies.
You could be responsible for debt after the death of your spouse, although this would only happen for joint debts.
If you’re worried about what will happen to your debt when you die, you can rest assured that it will come out of your estate, provided your debts don’t outweigh your assets. You can also make this easier on your family by appointing someone you trust to manage your accounts.