Debts technically can’t be inherited, but some can be passed on depending on the type of debt and how it’s owned. The estate—the assets left behind when a person dies—is generally responsible for paying any outstanding debts. Understanding what happens to debts can help you figure out how to handle debts left behind or help with estate planning.
Debts That Can Be Inherited
Several kinds of debts of a deceased person may become your responsibility, depending on the type of debt and your relationship to them. For example, some states require the surviving spouse to pay certain debts like healthcare expenses. Here are other types of debts you could be responsible for:
Joint Debts
You’ll be responsible for debts you hold jointly if the other party dies. For example, if you hold a joint credit card with your spouse and are equally responsible for regular monthly payments, you will still be responsible for payments if they pass away.
Cosigned Debts
If you’ve cosigned a loan, you’ve already agreed to be responsible for the debt if the primary borrower isn’t able to pay. Your agreement still stands even after the primary borrower’s death, so you will be required to make the payments if the loan isn’t paid off by their estate.
Mortgage or Home Equity Loan
Inheriting a house with an outstanding mortgage or home equity loan means you’ll have to make a decision about what to do with the real estate and how to handle the debt. “If you inherit an asset that has debt attached to it, you will be responsible for making payments on that debt if you want to keep the asset,” advises Diedre Braverman, an estate planning attorney with Braverman Law Group located in Boulder, Colo. Even if you’re considering selling the property, you must stay current on payments until the sale is final to avoid foreclosure. Mortgage payments won’t go on your personal credit report, Braverman said.
Debt in Community Property States
In certain states, two spouses equally own any money earned, property acquired, and debts accrued during the marriage. In these community property states, laws, a surviving spouse is responsible for repaying debts acquired during the marriage. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Timeshares
With a deeded timeshare, heirs may inherit benefits of the timeshare and the payments that come along with it. Depending on the timeshare company’s policy, an heir may have the option to decline the timeshare, and it will be offered to the next-of-kin. If both the heir and next-of-kin decline the timeshare, it may be foreclosed and the resulting debt will be taken from the estate.
Debts That Can’t Be Inherited
Several types of debts generally won’t be passed on to a spouse or relative, including individually-held credit card debt, federal student loans, unsecured loans, and collections. (A surviving spouse may be responsible for paying these debts in a community property state.) While those types of debts can’t be inherited, they aren’t automatically canceled. Instead, assets in the estate will first be used to pay off creditors who submit a claim. If the amount of the debt exceeds the estate assets, creditors may write off the debt and will not hold someone else responsible for paying it.
How Debt Is Handled After Death
Probate is the process where the court determines whether a will is valid. “[It’s] essentially the retitling process of all the decedent’s assets,” Braverman said. “In the process of retitling assets, any debts have to be paid before probate assets are distributed to the beneficiary.” Each state and municipality has its own rules for the length of time creditors can make a claim and how debts are prioritized. The executor of the estate gathers the assets, pays bills and taxes (including debts), then distributes any remaining assets according to the will or by state law if there is no will.
Probate and Non-Probate Assets
Not all assets pass through probate and, if they don’t, they can’t be used to pay the estate’s debt. For example, the person who died may have transferred a title to someone else before their death, or had a mechanism in place to transfer ownership. These non-probate assets should have a joint owner, trust owner, or named beneficiary (including a trust). On the other hand, probate assets must pass through probate and are divided to heirs based on the decedent’s will. These are typically assets you individually own that do not have a named beneficiary. If the deceased person has collection accounts that come up after probate, family members aren’t responsible for paying those, unless they were jointly owned. In addition, under the debt collection law, collectors can only discuss collection accounts with the deceased person’s spouse, parent (if the deceased was a minor), guardian, executive, or administrator. Collectors can contact other relatives, generally only once, to get contact information for the person responsible for paying the deceased person’s debts.
