Can You Inherit Debt? | Personal Capital
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Can You Inherit Debt?

Following the death of a loved one, financial matters can be complicated.

One aspect to consider is debt. It is possible to inherit debt in certain situations. However, when a loved one dies, a family member or spouse may not necessarily inherit the debt the loved one leaves behind. Instead, the deceased person’s estate usually takes care of any outstanding debts. The decedent’s estate is the property that an individual has at death.

In some cases, the decedent’s assets go through probate, a legal process that transfers a person’s property after they die. Probate ensures that the decedent’s debts, taxes and funeral expenses are paid. The probate process ends when the estate closes.

Property or assets that have the decedent’s name on the title only at time of death must go through probate. For example, a home, car or bank account owned solely by the decedent must go through probate. Co-owned assets may also be subject to the probate process if the assets owned do not include the right of survivorship.

Let’s take a quick look at the kinds of debts that can be inherited, when and how debt collectors may become involved, what should happen if debts can’t be paid and how to deal with the death of a family member. When someone dies, it’s an emotionally trying time, so knowing the types of debts that can be inherited and having a plan for how to handle it can cut down on stress and other emotions.

Key Takeaways

You can inherit debt, but a lot of the time, the deceased’s estate takes care of the debt in question. However, certain kinds of debt can be inherited through your parents or spouse, including mortgages, cosigned debts, joint debt and community property.

What Kinds of Debt Can be Inherited?

A few types of debts can be inherited, including mortgages, cosigned debts, joint debt, community property and medical debt. Let’s go over the definitions of each type of debt and how they will impact individuals with a deceased loved one.

Mortgages

A mortgage is a type of loan used to purchase a house, land or other type of real estate. If someone co-signed the loan or is a co-borrower with the deceased, they are required to take on the mortgage. On the other hand, if the deceased leaves the home to someone else, they have a couple of choices — they may be able to keep the home and take over the mortgage payments. However, many people who inherit a home continue to make payments as they put the house on the market to sell.

If nobody makes payments on the mortgage, the mortgage servicer will begin the foreclosure process on the home.

Cosigned Debts

A cosigner takes responsibility for paying back a loan alongside a primary borrower. A cosigner guarantees that an individual will repay a debt on time and in full. Cosigners are required to repay the debt if the primary borrower fails to pay — in short, they are just as responsible for the debt as the primary borrower.

For example, let’s say you cosigned a debt with a parent, such as a car loan or a home loan. You would inherit that debt. If you had not cosigned for the debt or applied for the credit together, you would not inherit the debt.

Learn more about how to stay positive when paying off debt, particularly if you’re working to pay off debt that you and your spouse had signed for together.

Joint Debt

When you have joint debt, you take out a loan or another type of financing with another person. The other person is also called a co-borrower. The loan is then issued in both of your names. Many individuals apply for joint debt in order to qualify for financing. For example, you may believe you wouldn’t be able to qualify on your own, such as if two incomes can help a couple qualify for a larger mortgage.

In this case, you are both equally required to repay the debt and independently responsible for paying back the loan. If one co-borrower dies, a lender will expect repayment to come from the other co-borrower.

Let’s say that you and your spouse are co-borrowers of a vehicle and your spouse dies. If the vehicle is registered in your joint names, then it would pass outside of the estate and ownership passes directly to you but you would continue to be responsible for the car loan..

Community Property

Some states recognize community property — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Community property with right of survivorship allows two individuals who are married to each other to legally (and equally) share assets. In other words, you can pass on assets to your spouse when they die without having to go through probate. In states that recognize community property, this method of holding and transferring title may be a better option than something like joint tenancy, which we’ll get into later.

You and your spouse not only hold property equally, but upon the death of one of you, your property passes to your surviving spouse while avoiding probate.

Medical Debt

Can you inherit medical debt? The doctrine of necessaries, also called the doctrine of necessities, gives spouses liability for the necessary support of each other, for example, in the case of medical care. In some states, the doctrine of necessaries says that creditors have the right to collect a debt from a parent or spouse.

When and How Do Debt Collectors Become Involved?

Ultimately, a person’s debts do not go away when they die. But when and how do debt collectors become involved?

First of all, it’s worth understanding what debt collectors can and cannot do upon the death of an individual. They can contact you once (as long as you are a surviving spouse, parent of a deceased minor child or executor or administrator of the estate) in order to find a personal representative. The executor is the person named in a will who will carry out a person’s wishes after death. If a will doesn’t present itself or doesn’t exist, the court may assign an individual as administrator, personal representative or universal successor.

However, they cannot mention the debt at all. They can only contact you again if they believe the information is incorrect. They also cannot claim that you are responsible for the debt if you are not or bend the truth about who should pay the debt in order to make you pay.

Depending on the estate laws of the state where the deceased individual lived, creditors have anywhere from three months to a year from the date of death to try to collect on their debts.

According to the Consumer Financial Protection Bureau, debt collectors must offer a validation notice, which helps you recognize whether a debt is yours or not. It should include the following:

  • A statement that the information is from a debt collector
  • Name and mailing information of both the debt collector and the consumer
  • The name of the creditor
  • Account numbers (if applicable)
  • Information about the amount of debt, including interest, fees, payments and credits
  • Your debt collection rights and information about how to dispute the debt
  • A “tear-off” form that you can send back to the debt collector to dispute the debt or take other actions

The collector must stop contacting you at that point. Note that if you don’t dispute the debt within 30 days, the debt collector assumes it’s a valid debt. If you write to dispute the debt, the debt collector must stop until it provides verification. Once they send you written verification of the debt, they can start contacting you again.

Some assets are protected from creditors, including the following:

  • Life insurance policies: Life insurance policies are contracts that occur between an insurance policy holder and an insurer. They offer beneficiaries money when the insured person dies.
  • Qualified retirement accounts: Qualified retirement accounts, such as a 401k or individual retirement account (IRA) must always go directly to the person(s) named as beneficiary. Learn more about saving for retirement and paying off debt.

Note that you can attempt to get debt discharged with a letter and a copy of the death certificate. However, it’s not always possible.

What if Debts Can’t Be Paid?

If a loved one dies with unpaid debt, it will first get paid from any money or property left behind, particularly if state law requires that it be paid. However, if there truly is no money or other assets left, then the debt generally will not end up getting paid, particularly if state law requires assets to go toward a decedent’s family members first.

How to Deal with Debt After the Death of a Family Member

If you have a family member who dies, you may wonder about whether you will become responsible for that debt, particularly if your parents die with debt.

Are You Liable for Your Parents’ Debt?

Can you inherit your parents’ debt?

Yes, it’s possible. In fact, a handful of states have what are called “filial responsibility laws,” which mean that children must cover long-term care costs that go unpaid (including nursing home and hospital bills). Note that these usually go unenforced, but you don’t want to encounter a nasty surprise later on.

However, note that as an adult child, you typically don’t have to use your own money to pay for your parents’ debt, but you can always count on exceptions, such as if you cosigned a loan with them or failed to settle the estate and didn’t follow the right laws. Debt can reduce your inheritance, however.

If your parents die with more debt than their estate is worth, it is called “insolvent.” The order that the debt gets repaid depends on state law, but will include:

  • Legal fees
  • Fees for administering the estate
  • Funeral and burial expenses
  • Secured debt (secured debt is an item that backs your loan, such as a home or a car)
  • Federal taxes and other federal debts
  • State taxes and debts
  • Unsecured debt like credit cards and medical debt

What Happens to Student Loans After a Death?

Federal student loans, which are loans that come from the federal government, are one of the only types of loans that can be completely forgiven.

Learn more about debt payoff.

Can you Avoid Inheriting Debt?

Yes, you can limit your chances of  inheriting debt. One of the ways you can avoid inheriting debt involves not cosigning for debt. Remember that cosigning for debt means that the borrower can’t qualify for a loan on their own and need your credit profile to make it happen for them.

Cosigning a loan means that you agree to repay someone else’s debt obligations, including late fees or collection costs. Both the loan and payment history will pop up on credit reports — not just the primary borrower. You’ll also see a small dent in your credit when you cosign for a loan. Finally, missed payments will negatively affect your own credit score. Furthermore, you may not be able to access as much credit as you did before you cosigned for the loan or you may be rejected for credit altogether.

Finally, as the cosigner, you may be at risk of collections before the primary borrower and may be liable for all costs, including attorney’s fees.

Next Steps for You

Ultimately, it’s important to keep in mind that creditors cannot try to get money from you unless you are a spouse, parent of a deceased minor, guardian, estate executor or administrator or have cosigned for or are otherwise responsible for debt.

Now that you can likely answer the question, “What debt can you inherit?” you may wonder what debt you should consider paying off first to avoid leaving debt to your own loved ones in the future.

Ready to plan your financial future? Personal Capital can help you match your asset allocation to your risk tolerance to help you put together a solid portfolio that meets your future needs.

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The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

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