Many people have this great question – can you inherit debt from your parents? In nearly all circumstances, you do not have to and responsible for the debt. When a person dies, his/her estate is responsible for settling all debts. If there is not enough money to pay off these debts, the debts are simply wiped out in most cases.
The children are not held liable for and required to inherit the debts of their deceased parents. However, if the child has co-signed the credit card agreement or loan, they will have to be held responsible for the loan, nothing else.
In this article, we will discuss what happens to the parents’ debt after death. Let’s learn more about it and understand whether you can inherit debt from your spouse or children if they pass away.
Describing What Happens to Your Parents’ Debt When They Die
The main point here is that you cannot ‘inherit’ debt from your parents. However, if you are the executor of their Will, you will have to get these amounts repaid. To repay these, you may sell high-value vehicles and/or property and use these funds to pay off the loans. However, this does mean that you may have to sell your personal properties to clear the debt, which is why you may receive less than what is initially agreed in the Will.
Do You Inherit Your Parent’s Debt – Kinds of Debts That Can Be Inherited
Here are some types of debt inheritance you should know about:
Beneficiaries’ Money Is Partially Protected If Named Properly
If you and your parent/s have completed a beneficiary form for each account like your 401 (k) and life insurance policy, unsecured creditors cannot collect money from those sources of funds. However, suppose the beneficiaries are not determined before the death. In that case, the funds are handed over to the estate, then handed to the creditors to pay off the remaining debt.
Credit Cards: Know What You Are Signing
Sadly, your credit card debt does not simply disappear when you die. In most cases, the deceased’s estate pays the debt on credit cards from the assets. In most cases, children do not inherit this unless they are a joint holder on the account. It means that even if you did not contribute in any way to the credit card balance, you are liable to repay the balance if your parent passes if you have signed a joint application for the card. However, this is not to be confused with being an authorized credit card user. Depending on the place where you reside, you may or may not have to pay the balance.
Federal Loans Are Forgivable
Federal loans taken by parents on behalf of their children or taken by students are forgivable. It means that if the borrower dies, the loans are forgiven. However, an original or certified copy of the death certificate will be required.
For private loans, there is no law stating that the lenders can cancel the loan. While some of the loans are forgivable, others may require the estate of the deceased to pay up. Therefore, you should check and confirm with the loan servicer about inheriting debt from parents.
Can You Inherit Debt from Your Spouse – Is It Possible?
The untimely death of a wife or husband can lead to emotional trauma as well as financial distress. Does spouse inherit debt? There are different circumstances to this question:
Joint Debt
In most cases, partners often opt for various types of loans, like a home loan, as joint applicants. If one of the applicants passes away, the surviving partner becomes liable to pay the loan. If the living co-applicant does not honor the loan terms, the lending body can take legal action.
Secured Debt
Can you inherit debt from your spouse? The answer depends. If one partner takes a loan and passes away, the surviving partner needs to provide a death certificate to the lender. If the living partner does not provide proof of death, the lender can enforce the security or take possession of the collateral.
However, the lender cannot simply compel the living partner to make the repayments as per law. The only thing that is enforceable is the security offered to the lender.
Unsecured Debt
Since unsecured loans do not require collateral, the lender cannot seize your property. If the borrower passes away before repaying the loan, the lender cannot ask the surviving partner to pay the rest of the loan. The partner only becomes liable if there are some assets inherited from the deceased. If there are no assets, then there is no liability.
Can You Inherit Child’s Debt – Can It Be Done?
In this case, the rule remains the same – parents are not to be held liable for the debts incurred by their children. Any amounts are cleared using the assets from the state. However, parents are only obliged to pay if they have co-signed a debt agreement. This means that if you have signed for any type of personal loan, like mortgage loans and car title loans, you will have to pay them if your children pass away. Federal loans like student loans are an exception.
The Bottom Line
From the above, we now have the answer to the question – what happens to your parents’ debt when they die? Death in the family is an emotional time, and you must know the laws and rules relating to debt inheritance. Do you inherit your parents’ debt? Overall, it depends on whether you have co-signed for the debt or not.
If you are concerned about the same, it is always better to talk to your spouse, children, and parents about how to get these financial obligations handled if they, unfortunately, pass away. Additionally, you would also want to discuss various financial safety nets that you can use to clear any type of sum that you may have incurred, like life insurance.