Liz Weston: How Your Parents’ Debts Could Survive Them | shop
Many people believe in one of two common myths when a parent dies in debt, says Michael Whitty, a Chicago estate planning attorney.
The first myth is that an adult child is liable for his parents’ debts. The second myth is that they cannot.
Adult children typically don’t have to pay their parents’ bills, but there are exceptions, and even if a child doesn’t have to pay directly, debt could diminish the inheritance.
Debt doesn’t just go away when someone dies, Whitty explains. Creditors may have claims against the estate, and these claims must usually be paid before anything is distributed to heirs. Creditors may also contact relatives about the deceased’s debts, even if those family members are not legally required to pay.
If you’re concerned that your parents’ debt might outlive you, consider speaking to an estate planning attorney for personal legal advice. Here are some issues to investigate.
If you can, can not be held responsible
In general, family members do not have to use their own money to pay off a deceased relative’s debt unless they:
n Co-signer of a loan if joint account holders or otherwise agreed to be held liable for the debt;
n are the surviving spouse and reside in a co-ownership jurisdiction or in a jurisdiction that requires the surviving spouse to owe debts such as medical bills;
n or were legally responsible for administering the estate and did not comply with state law.
For example, if you are the executor of your parents’ estate and distribute money to yourself or other heirs before paying off creditors, creditors could sue you to get the money back.
Should You Fear “Child Responsibility” Laws?
More than half of the states still have “child responsibility” laws on the books that could technically require adult children to foot their impoverished parents’ bills, says Letha McDowell, a Kitty Hawk probate and elders attorney. North Carolina.
These laws are holdovers from a time when debtor’s prisons existed, says McDowell, who is president of the National Academy of Elder Law Attorneys. Its use has declined since the creation of Medicare – the health care program for people over 65 – and Medicaid, the health care program for the poor, in 1965.
Store responsibility laws are rarely enforced, although in 2012 a nursing home chain used Pennsylvania law to successfully sue a son for his mother’s $93,000 bill. Some legal experts have predicted more such lawsuits as long-term care costs rise, but so far that hasn’t happened, McDowell says.
How creditors get paid, including Medicaid
If someone dies with more debts than assets, their estate is considered insolvent, and state laws usually dictate the order in which bills are paid.
Legal and other fees for administering the estate, as well as funeral and burial expenses will be paid. Depending on state law, dependent spouses and children may receive a temporary living allowance. Secured debt, such as a mortgage or car loan, must also be paid off or refinanced, or the lender may claim the property. Federal taxes and other federal debt have a high priority for repayment, followed by state taxes and debt, Whitty says.
For example, if Medicaid has paid a person’s nursing home expenses, the state can file a claim against the estate or a lien on the person’s home, McDowell says. Medicaid eligibility and recovery rules can be complex and vary from state to state, so it can be helpful to consult an elders’ rights attorney if a parent needs Medicaid to help cover nursing home bills, says McDowell.
She calls for proper planning “to make sure your family isn’t left without a home.”
Last debts to pay off include unsecured debts, such as credit card bills or personal loans. If there is not enough money to pay off that debt, creditors get a share of what’s left. Only after the creditors have been fully settled can the remaining assets be distributed to the heirs.
What to expect when collectors call
Often, creditors won’t even file a claim against a bankrupt crowd when there’s little hope they’ll collect, Whitty says. But that doesn’t mean they won’t ask surviving family members to pay.
Legally, collection agencies may contact a surviving spouse or executor to request payment and contact relatives to ask how to contact a spouse or executor.
But collection agencies are not allowed to say the debt is legally owed by a survivor when it isn’t, Whitty says.
“One of the reforms I’ve noticed in the time I’ve been practicing is that collection agencies are now required to certify that surviving family members are not obligated to pay the debt,” he says.
Of course, collection agencies are not known for always following the law. If you are contacted by an unethical or abusive collector, you should file a complaint with the Consumer Financial Protection Bureau (CFPB). You can do this and learn more about your rights under the Fair Debt Collection Practices Act on the CFPB website.
Liz Weston is a columnist at NerdWallet, a certified financial planner and the author of Your Credit Score.