Can You Inherit Debt?

There’s an old saying that the only one who sticks closer to you in adversity than a friend is a creditor.

It may seem especially true for those who must navigate the estates of deceased loved ones, especially if creditors come calling for unpaid debts such as taxes, bank loans, outstanding credit card balances and medical bills. That can add financial stress at an already vulnerable time.

It’s important to remember that debts do not directly pass to heirs or spouses. The deceased person’s estate typically pays outstanding debts.

It’s even more important to understand there are some kinds of debt that can be inherited and if you live in a community property state, there are differences in how a deceased person’s debt is handled.

“Generally, the assets of the person who passed are used to pay off any outstanding debts before anything can be distributed to the beneficiaries,” Oliver Morrissey, owner and founder of Empower Wills & Estate Lawyers, said. “This includes things like mortgages, personal loans, and credit card debts.

“If there’s enough in the estate to cover these debts, then it’s pretty straightforward. But if the debts exceed the value of the estate, things can get more complicated, especially for the surviving family.”

What Happens to Debt When Someone Dies?

Almost 75% of people die with debt, raising concerns for spouses and children about whether that debt can be inherited.

Generally speaking, the assets in a deceased person’s estate are used to pay off debts at the time of death.

Survivors should be aware that using those assets to pay off debt can greatly reduce or even eliminate money they might have inherited.

Debt does not directly pass to heirs unless those heirs are connected to the debt through legal agreements, such as co-signed loans or joint credit cards.

In some cases, the laws of a particular state – there are nine community property states, for instance – mandate that surviving spouses or heirs are responsible for paying certain debts.

Any remaining debts after an estate is settled, will often get discharged, meaning forgiven.

“Some creditors might not get paid if an estate is insolvent, which means it doesn’t have enough assets to pay off all of its debts,” Steven Kibbel, a certified financial planner and senior editor at InternationalMoneyTransfer.com, said.

“Credit cards and other unsecured debts are usually discharged first in this situation. Nonetheless, secured debts associated with assets (such as a home) must still be paid off by selling or refinancing the asset.​”

Types of Debt That May Pass On to Survivors

The circumstances under which you can inherit a parent’s or spouse’s debt vary by complexity and by state law.

Understanding the different types of debt that can be inherited may not require a consultation with an attorney but legal advice is helpful in complicated cases or when survivors want assistance in dealing with collection agencies.

Obviously, if your last surviving parent leaves you a home with an existing mortgage or a car they haven’t paid off, you become responsible for paying those associated loans or selling them off. Other situations can be more complicated.

“If you’re worried about getting stuck with a loved one’s debts or want to make sure your assets are protected, it’s best to talk to a lawyer or financial advisor as soon as you start dealing with any shared financial stuff,” Morrisey said. “That might be when you become a co-signer or even just an authorized user on their credit card.

“It’s not always obvious what those roles mean for you if they pass away, so getting some advice can help you know what to expect and avoid surprises. A quick chat with a pro can clear up what you might be responsible for and give you some peace of mind.”

The types of debt that may be inherited include shared debts, such as co-signed loans, joint financial accounts and debt held in a community property state.

Co-Signed Loans

By becoming a co-signer on a loan, you accept legal responsibility for that debt if the primary borrower passes away or defaults on payments.

The surviving co-signer must continue to make payments or face collection. Failure to do so can result in significant damage to the survivor’s credit score.

Joint Account Holders

Joint account holders are equally responsible for the debt, even after

one account holder dies. If you’re part of a joint credit card account, for instance, you become liable for the entire balance on the card at the time of the other person’s death.

That only applies to joint accounts, not to an individual who is listed as an authorized user on an account.

It’s one reason financial advisors recommend you have a serious discussion about debt before entering a legal agreement that increases your liability.

Community Property States

In a community property state, assets acquired during a marriage are owned equally by both spouses. Debts acquired during a marriage are also generally shared and become the responsibility of the surviving spouse even if they weren’t directly involved in taking on that debt.

The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

Assets and debt in a community property state are typically shared whereas in a common law property state, if one spouse puts his or her name on the title of a car as sole owner that asset belongs only to that individual.

Protecting Yourself from Inheriting Debt

Smart estate planning is the surest way to protect yourself and your assets from inherited debt. But beyond setting up trusts as protection, it’s equally important for people to understand the financial agreements they’ve entered.

“The first way (to protect yourself) would be not to co-sign or have a joint account,” Chad Gammon, owner of Custom Fit Financial, said. “Another would be to meet with an estate planning attorney. They can help with the correct estate planning documents and they would know your specific state laws.”

Besides the nine community property states, other states allow spouses to opt into the community property system or designate specific assets as community property.

Seeking professional financial or legal advice can help ensure personal assets are protected when a loved one dies. If you don’t have a working knowledge of how life insurance and other financial tools can help cover outstanding debts, such as taxes, it makes even more sense to consult with a lawyer or financial advisor.

“Relying on the estate alone can sometimes leave little to nothing for the heirs, which is where life insurance or other options can come in,” Morrisey said. “Life insurance is one way to ensure there’s extra money available to cover debts, but it’s not the only solution.

“Trusts can be designed to protect certain assets from being used to pay off debts, depending on the structure. This way, you might ensure that some money or property is set aside for the beneficiaries, even if other parts of the estate need to be used to settle debts.”

How to Handle Debt Collectors After a Death

Last on the list of people you want to hear from after the death of a loved one, is a debt collection agency. Just know debt collection agencies are legally allowed to contact a surviving spouse to discuss debts or to request contact information for the executor of an estate.

What isn’t expected, and need not be tolerated, is a debt collection agency becoming overly aggressive and threatening or harassing survivors to pay back debts.

Clear guardrails are in place through the Fair Debt Collection Practices Act,  a 1977 amendment that protects consumers from abusive debt collection practices.

Understand your rights when dealing with aggressive attempts to settle debts, including the right to submit complaints to the Consumer Financial Protection Bureau if you believe a collection agency is breaking the law in how they contact you, or by pressuring you to pay debts that may not be yours.

It’s smart to ask for a written account of the history of debts claimed by a collector but even better to put all correspondence with debt collection agencies in writing and keep track of the time and date of any and all phone calls.

Make sure all claims by debt collectors are valid. Some debt could fall outside the statute of limitations. If you have any questions, consult with a consumer lawyer or call a legal aid office in your area for discounted legal services.

Reminder: You will need a copy of the death certificate to start the probate process during which creditors and mortgage lenders can request payment from the deceased’s estate.

A death certificate is also needed to claim any earned benefits, to access financial accounts and to transfer assets.

Managing Debt After a Loved One Passes

By taking proactive steps in estate planning and financial management, people can save themselves (and their own beneficiaries) the stress and uncertainty of managing debt after death.

While most debt can’t be inherited outside community property states, things like joint credit accounts and co-signed loans typically can be inherited. Being the responsible party, especially if it blindsides you, can cause hardship for someone who may already be underwater financially.

A free consultation with a nonprofit credit counseling agency can help, especially if debt is already an issue for you.

Also, consulting with a financial planner or estate attorney can safeguard your assets. While nothing can fully prepare you for the emotional toll of losing a loved one, being proactive can offer some peace of mind during a process that can be overwhelming.

“It’s a good idea to get advice if you’re handling an inheritance, especially if you’re not sure what kind of debts your loved one left behind,” Morrisey said. “Dealing with probate can get messy, and sometimes you find out about debts like unpaid taxes or loans you didn’t even know existed.

“A lawyer can walk you through your options, like whether it’s better to accept or even turn down an inheritance if it means avoiding a pile of debt. It’s a lot easier to make those calls when you know exactly what you’re dealing with.”