Can You Inherit Debt?

Grieving the loss of a loved one is hard enough as is, and worrying about paying their debt can add anxiety to sadness. “Can you inherit debt?” is a question that many of us may ask during such situations in order to get some peace of mind. Unfortunately, the answer to that question is: it’s complicated.

Generally, you can’t inherit debt from your parents, spouse, or even children. But, as always, there are exceptions to the rule. Read on to learn when you may be responsible for a deceased person’s debt. 

What happens to someone's debt after they die?

That’s a tough question, so for the sake of simplicity, we’re only going to look at what happens to the money when someone dies. Any property the person has when they die is known as their estate. An executor is appointed to make sure the property is transferred according to the person’s wishes. 

The person’s estate is used to pay any debts. There’s an order of priority that should be followed:

• Estate-related costs such as attorney fees and taxes

• Burial and funeral costs

• Family allowance (only applicable in some states)

• Outstanding federal taxes

• Medical expenses not paid by insurance

• Property taxes

• Credit card balances and personal loans

After these expenses are paid, anything left over is distributed according to the person's will. If there’s not enough money to pay the debts in full, they’re usually written off.  

When can you inherit debt?

There are three circumstances in which you may need to continue paying a person’s debt after they die. 

Secured loans

These are loans that have collateral backing them up. Think of a car or home loan. If the payments aren't made, the bank can claim the collateral to try to get back some of their money. 

If you inherit property that’s being used as collateral, you must keep paying the loan. This usually occurs with a home, where you have to pay the mortgage to keep the house. If you don’t pay, the bank can foreclose. 

Joint loans

If you have a joint loan, you’re still responsible for the balance. If you have a long-term partner, you may have taken out a home or car loan together. If your partner dies, you will need to pay the full amount remaining on the loan. 

Community property

Some states have community property laws that say any assets or debts you get while married belong to both spouses. In these states, you’re responsible for the debts of your spouse if they die. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. 

What debt can’t be inherited?

Credit card debt, personal loans, and unsecured loans aren’t inherited, unless they’re joint loans. However, in community property states, a surviving spouse is responsible for these debts. 

If you’re an authorized user of a parent's or spouse’s credit card, there’s no need for you to pay the debt. Remember, you can’t use the authorized credit card after the person’s death, as this is considered fraud. 

What about medical debt and student loans?

Medical and student loans are usually the big ones. They’re often for large amounts of money and feel like they never go away. But, can you inherit this debt from your parents or spouse?

Medical debt

Medical costs that aren’t covered by insurance can be very high. Collectively, Americans owed at least $195 billion in medical bills in 2019, though only 1% of adults owe more than $10,000. However, if your loved one died of an injury or illness, it’s likely hospital bills are on your radar. 

Thankfully, most medical debts work the same as other debts. It’s only inheritable if you cosigned for a loan. The owner of the debt can make a claim against your loved one's estate but can’t chase you for any unpaid bills. 

Medical debt becomes a little more complicated when it comes to Medicaid. If you’re the sole inheritor of a parent's or grandparent's estate who was on Medicaid, it’s important to understand the Medicaid Estate Recovery Program. 

While children don’t inherit debt, states can recover certain benefits paid on behalf of a Medicaid recipient. These include nursing home fees, home and community-based care costs, and hospital and prescription drug services. This works the same as with any other debt, with Medicaid making a claim against the estate. 

However, there are some instances when Medicaid can’t take money from an estate. If the deceased has a living spouse, a child under age 21, or a blind or disabled child of any age, there’s no estate recovery. Likewise, if the estate recovery would cause undue hardship, the government has to waive it. 

There’s also something called filial responsibility laws in 25 states. These laws basically state that adult children have to care for impoverished parents. 

In a 2012 lawsuit in Pennsylvania, a nursing home sued a woman’s adult son for care costs based on this law. The nursing home won, and the son had to pay $93,000. However, there hasn’t been a similar case since then. 

Generally, these laws haven’t been enforced since Social Security, Medicare, and Medicaid were established. No matter how small the chance, it’s still better to know about the possibility in advance. 

Student loans

Given that a student loan doesn’t go away even if a person goes bankrupt, thankfully that’s not the case when someone passes.

Federal student loans are automatically canceled if the borrower or student dies. This means if your parents took out a federal loan on your behalf, you don’t need to pay it back if they die. It also means that if you die, your parents don’t need to keep paying the loan.

Private student loans follow the same rules as other debts. If you're a cosigner on the loan, you have to keep paying it back. Otherwise, the lender can get any debt paid by the estate. 

What about taxes owed to the IRS?

While taxes don’t really count as debt, they're a financial responsibility that still exists after death. A person’s surviving spouse or child has to file a final tax return. If there’s tax due, it also has to be paid, whether from the estate or by you. 

If your partner died and you have surviving children, you can file your own tax return as a qualifying widow or widower. This lets you use joint tax rates and the highest standard deduction, possibly giving you a bit more money back as a refund. 

Protected assets

Some types of assets can’t be claimed by creditors after death. They’re called nonprobate assets because they don’t need to go through the probate process. There are two situations when an asset is protected:

• Designated beneficiary: You name someone as the beneficiary and they get the asset, no matter what the will says.

• Joint tenancy with rights of survivorship: You own an asset jointly with someone and the legal contract says the other owner inherits it in full.

As these assets don’t need to go through probate, you can usually access them more quickly than other types of property. There are some types of protected assets that are regularly part of a person’s estate. 

Retirement accounts

Most retirement accounts allow you to name a beneficiary, including 401(k) and IRA accounts. If you’re listed as the beneficiary, the money should go directly to you and be protected from creditors. 

Trusts

Trusts are commonly used to protect assets from creditors and estate taxes. The person who sets up the trust can say exactly how and when the assets get passed on. 

There are different types of trusts that do specific things. If you or your parents are thinking about setting one up, it’s best to speak to an attorney with estate planning expertise. This will make sure the trust does what you want it to do. 

Life insurance

Like retirement accounts, life insurance policies name a beneficiary. The proceeds go directly to the person named and aren't available to creditors. 

Can I tell debt collectors to get lost?

Debt collectors are allowed to contact you or another survivor to find out who's the executor of your loved one’s estate. This allows them to make a claim against the estate before the probate process starts. 

They aren’t allowed to harass you or tell you you’re responsible for your loved one’s debts. This is covered in the Fair Debt Collections Practices Act (FDCPA).

Despite this, debt collectors may still come calling. They might tell you you have a legal or moral responsibility to pay your loved one's debts. If a debt collector won’t leave you alone, consider filing a complaint with the Consumer Financial Protection Bureau.

Some debt collectors may try to collect debt that isn’t valid or has passed the statute of limitations time period. If you’re not sure if you’re responsible, tell the collector you’re still sorting out your loved one’s estate and you’ll get back to them. 

A consumer law, estate, or probate law attorney can help you figure out if the claim is valid. They can also handle the debt collectors for you. If you can’t afford an attorney, you can often get help at legal clinics or legal aid offices. 

What should I do after a loved one’s death?

Debt is the last thing you want to think about when grieving, but procrastination isn’t your friend in these circumstances. The longer you put off managing a deceased person’s finances, the more likely there are to be complications. These are some steps you can take to make it easier to manage your loved one's finances after their death. 

Figure out who’s in charge

If the deceased has a will, the person in charge will be the executor or trustee. If there’s no will, make a decision about who takes charge. 

A surviving spouse is normally the first option, though if your surviving parent is elderly, they may not want the responsibility. Otherwise, a family member who lives close by is a good bet. Being nearby will allow them to get necessary documents from the court and coordinate with real estate agents. 

Obtain a death certificate

You’ll be surprised how many times a certified death certificate is needed to finalize financial obligations. Get around a dozen certified copies so you have one on hand when needed. Your funeral director should be able to help you obtain these. 

Inform everyone

A lot of places need to be informed about a person's death. As recently deceased people are often targets for identity theft and fraud, it’s important to do this as soon as possible. Places to advise include:

• Government agencies: Social Security, Medicaid, Medicare, the VA, and any other departments they interacted with

• Financial institutions: Your loved one’s bank, insurance company, and financial advisor 

• Creditors: Any entities they owed money to, especially credit card companies

• Credit bureau: Inform one of the three major credit bureaus, and they'll notify the other two

Informing the credit bureau allows them to freeze your loved one’s credit report. This is an important step in fighting fraud. 

Get legal help

If you have any questions about your loved one’s finances or debt, talk to a lawyer. They can help you through the probate process and make sure the deceased’s assets are protected. 

So, do you inherit your parents' debt?

Want the key takeaways about debt and inheritance? Here they are:

• Debt doesn’t generally get passed down

• Debts get paid off from the deceased person’s estate

• If it’s joint debt or you’re a cosigner, you’re still responsible

• Debt collectors aren’t allowed to harass you about these debts

We understand this isn’t the most pleasant subject to discuss. But as with any big decisions that pertain to money, it’s important to know the facts to protect your financial future.