If your parents have died or potentially are near the end of their days, you may be wondering what items will need handled by you after they pass. Hopefully they had prepared a will and most items were looked at and considered in advance by your parents. When they do pass, the time will be quite tragic and many people don’t want to worry about things like real estate and finances. Some adult children learn that their parents left behind a load of debt. The question that comes up is whether or not an adult child gets stuck with their deceased parent’s debt.
Does Debt Pass on to Children?
The short answer is not usually. There are times when the debt would pass on, but for the most part, it’s not. If you cosigned on a loan with your parent, you would get the debt.
In most cases, your parent’s real estate would take the debt. This means that any creditors that your parents owe money to would be granted a certain timeframe, usually two to six months, to make claims against their real estate. If the house won’t cover the debt, the debt typically dies with them. Before the debt can die, creditors will go after any money or assets your parents had, including inheritance money.
Even though you aren’t responsible for your parent’s debt, their debt can still affect you after they pass. Creditors have the right to pull money that was intended as your inheritance if there is an outstanding debt. This means you would receive less, or maybe none, of that money your parents intended for you.
Creditors can pull money from your parent’s IRA or 401k unless you were listed as the beneficiary on the account. If you weren’t, the money would go to the estate for creditors to make claims against.
How Debt is Collected after Death
Many times the house is sold to pay off creditors and if it doesn’t cover it, they have the right to look further into any assets and extra money. Here are the different types of debts and how they are assessed after a death.
If your parents leave you their home and the mortgage is not paid off yet, it can be a complicated issue. The lender shouldn’t demand you pay off the mortgage in full immediately, but they will expect payments from you going forward.
You can also decide to sell the house. If the mortgage is worth more than the home when you want to sell it, you can talk to the bank about a short sale. If they won’t do it, then it would be foreclosed. You wouldn’t be expected to pay the difference between the sale price and money still owed on the loan. The bank would actually go after the estate for the difference.
The good news is if the home forecloses, it won’t affect your credit score as long as your name was not on the mortgage. Most banks will only report the foreclosure under the loan name rather than the title name. If you don’t want it titled in your name, you can disclaim the inheritance which means it would go to the person your parents designated if you had died before them.
Credit Card Debt
Credit card debt will not be passed down to you after your parent’s death. It only would if you were a cosigner on the card. Debt collectors may try to request payment from you if you’re the executor. Credit cards are low-priority which means federal and state tax agencies, funeral homes, and other various lenders would be paid first.
For parents that weren’t on Medicaid, the insurance program for those that can’t afford care, the estate is responsible for paying unpaid hospital and doctor bills if the moneys there. When the estate can’t pay, some states have filial responsibility laws which require adult children to pay for their parent’s unpaid medical debts.
If your parents had Medicaid, the state can collect payments that were made on your parent’s behalf after your parents died. They would start payments from the age of 55 and older. The state would most likely place a lien on the home or they’ll negotiate with an executor to pay less than the grand total.
The good news is that the state can’t collect from your own funds to pay the bill or from a surviving spouse. If you or your adult siblings lived in your parent’s home, the state won’t collect if you lived there for at least two years before death and you were providing care that would have delayed the need for a nursing home or medical facility.
What Can I Do?
If you have cosigned for a loan with your parents or are required to pay any of their medical bills, you have options to handle the debt. Along with working out payment plans with any of the creditors, you can always get a bill consolidation loan to combine all of your debts into one loan. This is great if you have debts with high interest or monthly payments you can’t afford. Debt consolidation loans give you one loan to pay each month with a lower monthly payment and lower interest rate. The life of the debt may extend but it’ll give you the convenience of only paying one creditor per month at an affordable cost to you.
While the death of your parents is a time of grieving, knowing the laws about debt after death is a good way to protect yourself by understanding the process of what may happen with the money owed.