Inheriting Debt from a Family Member
When a loved one passes away, his or her outstanding debt (and how that debt will be paid) likely won’t be the first thing on your mind. Unfortunately, many people find themselves dealing with a deceased family member’s creditors as they grieve. While no one likes to think about a loved one’s passing, it makes good financial sense to consider these matters ahead of time.
Who’s responsible for outstanding debt?
Generally, the deceased person’s estate assets are used to satisfy creditor claims before assets are distributed to the beneficiaries. If the estate assets are insufficient to pay all of the outstanding debt, the estate is considered “insolvent,” and state law prioritizes the payment of the deceased person’s bills with the available assets.
The probate system in the courts is often a good way to resolve outstanding debts that have been left by the deceased family member. Creditors have a limited time to file claims against the estate after the probate case is opened. In Nebraska, they must file within two months or the estate will not be obligated for the claim, with some limited exceptions. The final date for filing is included in the formal notice of probate that is printed by the court.
In some cases, however, outstanding debts may not fall to the estate. For example:
How are different types of debt handled?
Credit card debt.
Again, family members are not responsible unless they cosigned on the credit card. Although debt collectors may be aggressive, they can only make a claim against the estate. If you did cosign, you will be held responsible for the debt, even if you didn’t directly incur it.
If the deceased family member qualified for Medicaid, the state may try to recover the payments made for his or her care. The state cannot ask you to pay, but it may be able to put a lien on the decedent’s home to recover the funds. If a family member dies with other unpaid medical bills (unrelated to Medicaid), those bills become an estate debt. Nebraska does not have a “filial responsibility” statute that, in many states, hold adult children responsible for a deceased parent’s medical debt under certain circumstances. However, the spouse of a deceased person is liable in Nebraska for medical expenses as well as other “necessaries.” Be sure to understand how state law may apply in your situation. If you are in doubt, consult an attorney who is experienced in these matters.
If you inherit a residence with a mortgage, you generally aren’t required to pay it off immediately. If you fail to make the mortgage payments, however, or cannot sell the house for a price that will pay off the mortgage, the lender will likely foreclose (or possibly agree to a short sale). If you don’t wish to own the real estate, you may disclaim it, at which point it would transfer to the next estate beneficiary.
Student loan debt.
Federal programs, such as Perkins and Stafford loans, usually offer cosigners forgiveness if the borrower passes away. Private loans may be another story, however. Although some lenders have started to discharge the debt if a borrower dies or becomes disabled, many demand the money owed from cosigners.
The estate is responsible for paying any property, income, or estate taxes. Tax claims have top priority as creditors in probate.
Don’t be bullied
Family members of deceased debtors-and all consumers-are protected by the federal Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using abusive, unfair, or deceptive practices in attempting to satisfy a debt. Under the FDCPA, collectors can contact the deceased person’s spouse, guardian, executor, or administrator to discuss a debt, but you do have the right to control your interactions with these collectors. For more information, visit the Federal Trade Commission’s website at www.consumer.ftc.gov/articles/0081-debts-and-deceased-relatives.
Know where you stand
Inherited debt can be a complex issue to sort out. If you find yourself in this situation, seek advice from your financial advisor and an attorney who can guide you through the probate process and work with any debt collectors. Although dealing with a loved one’s death is never easy, getting your questions answered and protecting your inherited assets may make the situation a little less stressful.
Thanks to Christopher Borden, CRPS®