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Losing a loved one is an extremely difficult thing to go through. And while money is probably the last thing you want to think about as you grieve, it's important to understand how assets and debts left behind will impact you and others.
In most cases, an individual's debt isn't inherited by their spouse or family members. Instead, the deceased person's estate will typically settle their outstanding debts. In other words, the assets they held at the time of their death will go toward paying off what they owed when they passed.
However, if their estate can't cover it or if you jointly held the debt, it's possible to inherit debt. Laws on inheriting debt vary by state, and assets may be protected from creditors if certain measures have been taken, such as the creation of a living trust.
What Kinds of Debt Can Be Inherited?
While individual debts typically aren't the responsibility of those left behind, some types of debts may be inherited when someone dies. If your loved one passes away and their estate doesn't cover all of their outstanding debts, you could be responsible in these situations:
- Joint and cosigned debt: If you were on a joint account such as a joint credit card with somebody, and they die, you as the remaining account holder will be responsible for paying the debt. Authorized users, however, typically are not responsible for credit card debt, according to the Consumer Financial Protection Bureau (CFPB).
- Debt in community property states: In some states with community property laws, a surviving spouse may be required to pay some of their deceased spouse's debts with community assets. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin; Alaska allows spouses the option to make their property community.
- Home equity loans on inherited homes: If you inherit a home from a loved one when they die, and they had a home equity loan on the property, you unfortunately also inherit that debt.
With other types of debt, it depends. For example, if your parent or spouse dies with medical debt, their estate's assets will go toward paying it off. If the debt exceeds the assets, the creditors may just write off the debt, meaning it doesn't have to be paid. But if you cosigned on medical bills or live in a community property state, you could be on the hook for their medical bills. Some states do have laws on the books that make adult children financially responsible for their parents if the parents can't afford to support themselves. These laws are not usually enforced in terms of medical debt, however, since Medicaid will often cover it.
Credit card debt is similar, in that it depends on the circumstances and where you live. If you and your loved one had a joint credit card account or you were a cosigner on a loan, you likely will be responsible for the outstanding debt. If it was an individual account, you may owe nothing—unless you live in a community property state, in which any debt incurred during marriage is considered joint. If you're not in a community property state and you weren't a cosigner or joint account holder, you shouldn't inherit their credit card debt.
Again, laws vary by state, so make sure to check the laws where you live or hire an attorney to help you understand your debt obligations.
What Kinds of Assets Are Protected From Creditors?
Certain types of assets are generally protected from being claimed by creditors when your loved one passes. Even if your spouse or family member has outstanding debt, these assets are considered "non-probate assets" since they have a designated beneficiary or what's called joint tenancy with rights of survivorship. This means you can bypass the complicated probate court process and receive the asset directly, regardless of whether there's a will or not.
- Retirement accounts: If your loved one has a 401(k), IRA or other type of retirement account with you listed as a beneficiary, it should go directly to you and be protected from creditors.
- Life insurance: If you're the named beneficiary for your loved one's life insurance, it will pass directly to you and can't be taken by creditors.
- Living trust: Trusts are legal arrangements that hold assets for beneficiaries and can usually bypass the probate process. There are different types of trusts, but some can help protect the estate from creditor claims, in addition to reducing taxes.
How to Deal With Debt After the Death of a Family Member
When you lose a loved one who had outstanding debts, debt collectors may come calling. They are allowed to contact a deceased person's spouse to identify the estate's executor or administrator. However, they aren't allowed to claim that you're responsible for paying off these debts unless you truly are legally obligated (like in the case of joint debt).
While they may believe they are acting within their rights, it's possible a debt collector will try to collect debt that isn't valid or has passed the statute of limitations. Make sure to familiarize yourself with debt collection laws and understand how to deal with debt collectors.
The Fair Debt Collection Practices Act (FDCPA) regulates what collectors can and can't do: They're not allowed to threaten you, harass you with repeated calls or claim they'll take your property they're not entitled to, among other things. If you believe a debt collector is violating your rights, you can send them a letter asking them to stop and report it to your state's attorney general or submit a complaint with the CFPB.
If debt collectors insist you're responsible for your loved one's outstanding debts and you're unsure how to proceed, consider hiring a lawyer. They can determine whether these claims are valid and help you deal with collectors. The CFPB advises looking for a lawyer who specializes in consumer law, estate or probate law, debt collection defense or the FDCPA. If you can't afford it, look for legal clinics or legal aid offices in your area that offer free or discounted services.
Make Sure Creditors and Credit Bureaus Are Updated
The executor of your loved one's estate (which may or may not be you) needs to send a copy of the death certificate to their creditors. Once notified of the passing, the creditors will likely pause collecting any unpaid bills as the estate is sorted out.
The creditors will also inform the credit bureaus of the death, which should prevent others from using the person's name to apply for new lines of credit. Even if you've contacted creditors, it's wise to also contact the credit bureaus (Experian, TransUnion and Equifax) directly to ensure they have updated the credit report to indicate the person has passed away. If you had any joint or cosigned accounts with your loved one, get a free copy of your credit report to ensure your accounts remain in good standing as you navigate this difficult process.