How Your Parents’ Debt Could Outlive Them
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Many people believe one of two common myths when a parent dies in debt, says Chicago estate planning attorney Michael Whitty. The first myth is that an adult child will become liable for their parents’ debt. The second myth is that they can’t.
Adult children typically don’t have to pay their parents’ bills, but there are exceptions. And even when a child doesn’t have to pay directly, debt could reduce what they inherit.
Debt doesn’t simply disappear when someone dies, Whitty explains. Creditors can file claims against the estate, and those claims usually have to be paid before anything is distributed to heirs. Creditors also are allowed to contact relatives about the dead person’s debts, even if those family members have no legal obligation to pay.
If you’re concerned that your parents’ debt might outlive them, consider talking to an estate planning attorney for personalized legal advice. Here are some issues to explore.
When you can and can’t be held personally responsible
Generally, family members don’t have to use their own money to pay a dead relative’s debts unless they:
Co-signed a loan, were a joint account holder or otherwise agreed to be held responsible for the debt.
Are the surviving spouse and live in a community property state or a state that requires surviving spouses to pay debts such as medical bills.
Were legally responsible for settling the estate and didn’t follow state law.
For example, if you’re the executor of your parent’s estate and distribute money to yourself or other heirs before paying off creditors, the creditors could sue you to get the money back.
Should you fear ‘filial responsibility’ laws?
More than half of the states still have “filial responsibility” laws on the books that technically could require adult children to pay their impoverished parents’ bills, says estate and elder law attorney Letha McDowell of Kitty Hawk, North Carolina.
These laws are holdovers from a time when debtors prisons existed, says McDowell, and are rarely enforced. Their use has faded since the 1965 creation of Medicare — the health coverage program for people 65 and over — and Medicaid, the health coverage program for the poor.
How creditors get paid — including Medicaid
If someone dies with more debt than assets, their estate is considered insolvent and state law typically determines the order in which the bills get paid. Here’s a breakdown of priority order for what gets paid first:
Fees and taxes for administering the estate, such as attorney and executor costs and estate taxes.
Burial and funeral costs.
Family allowance for dependents, if provided in state law.
Federal taxes.
Medical expenses.
Property taxes.
Secured debts like car loans and mortgages.
Credit cards and personal loans.
Federal taxes and other federal debts have a high priority for repayment, followed by state taxes and debts, Whitty says.
If Medicaid paid for someone’s nursing home expenses, for example, the state can file a claim against the estate or a lien against the person’s home, McDowell says. Medicaid eligibility and recovery rules can be complex and vary by state, which is why it can help to consult an elder law attorney if a parent may need Medicaid to cover nursing home bills, McDowell says.
She urges planning appropriately “to make sure that your family doesn't wind up without a house.”
Secured debt such as mortgages or car loans must be repaid or refinanced, or the lender can claim the property. The last debts to be paid include unsecured debt, such as credit card bills or personal loans. If there’s not enough money to pay those debts, the creditors get a share of whatever is left. Only after creditors are paid in full can any remaining assets be distributed to heirs.
What to expect when collectors call
Often, creditors won’t even file a claim against an insolvent estate if there’s little hope they’ll collect, Whitty says. But that doesn’t mean they won’t ask surviving family members to pay.
Legally, debt collection agencies are allowed to contact a surviving spouse or executor to request payment and to contact relatives to ask how to reach a spouse or executor. However, collection agencies aren’t allowed to say that the debt is legally owed by a survivor if it isn’t, Whitty says.
“One of the reforms that has been noticeable over the time I've been practicing is that collection agencies now must affirmatively state that the surviving family members are not obligated on the debt,” he says.
Of course, collection agencies aren’t known for always following the law. If you’re contacted by an unethical or abusive collector, consider filing a complaint with the Consumer Financial Protection Bureau. You can do that, and learn more about your rights under the Fair Debt Collection Practices Act, at the CFPB website.
