Overview
When a loved one is deceased, there is always a fear that the next of kin, or inheritor of Estate will inherit the debt.
In this guide we’ll examine inherited debt, exploring whether you can really inherit debt, what happens to a deceased person’s estate, and what to do if a loved one is carrying debts when they die.
Wikipedia defines inheritance as ‘the practice of passing on property, titles, debts, rights, and obligations upon the death of an individual’.
But, in this article, however, our focus would be o the debt aspect of inheritance. What happens when your parents die broke? Can you inherit a debt?
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Can you inherit debt?
By law, it is impossible to inherit debt from a deceased person, unless you co-signed a joint debt. In the case of co-signing, you will become responsible for 100% of repayment. Therefore, you cannot ‘inherit’ a loved one’s debts if they die. Debts are not passed down between generations of family members, and under debt collection laws, debt collectors can only pursue named debtors (i.e. the deceased).
When a person dies, any money they owe to creditors is taken from their ‘estate’. An estate is the sum total of a person’s belongings, including assets like a house or car, savings, pensions, etc.
When a loved one dies, their will should name the executors who are responsible for carrying out the will-maker’s instructions. Part of an executor’s role is to identify the deceased’s assets and liabilities, to pay outstanding debts from the estate and to deal with what remains.
If there is no will, the person has died intestate and there are specific laws to address this situation.
That means if your loved one owed money when they die, you wouldn’t be responsible for paying it. That said, if you are the executor of their will, it may well be you who has to deal with the deceased person’s debts.
Are there any kinds of debt that can be inherited?
While you cannot inherit the debt of a deceased by the mere virtue of being their ward or next of kin, there are however, certain debts that you could be liable for, and they are briefly discussed below:
- Joint debt or consigned debt: While individual debts will usually be paid by the estate or written off when a person dies, this is not the same for joint debt. Joint debt is any debt you take out with another person, like a joint bank account or a mortgage on a family home.
- 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. If you are paying up a joint debt with someone who then dies, then under the principle of joint and several liability, you will become responsible for the repayment of the total debt in the eyes of the creditor.
- Home equity loans on inherited homes: Home equity loans are secured debts; a person will offer their home as security against the loan, which gives them more chance of being accepted.
Because home equity loans essentially attach debt to a property, if you then inherit a home with a home equity loan against it, that debt will become yours. It is possible for you to keep the home, but first you will need to pay off the debt inherited from the deceased.
What Happens if Someone Dies with Unpaid Debt?
The general rule across all jurisdictions is that outstanding debts must be paid by the deceased’s estate before any other property or assets can be distributed to their heirs. But, then again, whose responsibility is this? If the deceased a valid will in place, they have already named someone to oversee their estate, known as an executor. This person is given the legal responsibility to carry out the deceased’s wishes in terms of who receives what property and for taking care of any possible debts that the person may have left behind.
If however, they debtor died without a valid will, their estate will go through the legal process of intestacy. During intestacy, state law dictates who is entitled to inherit from the deceased and what portions. Depending on the jurisdiction, a probate court judge will appoint someone to perform the executor’s duties, called an estate administrator or personal representative. It is then that person’s responsibility to pay the deceased’s debts and distribute the estate as ordered by state law and the judge.
How should I deal with a deceased person’s debts as an executor?
As an executor of a will, you are expected to make arrangements to repay debts via their estate. It is always best to contact a solicitor. Handling the estate of a loved one can place very great emotional, logistic and psychological weight on an an executor. An attorney will guide you through the probate process and help you deal with creditors.
Additionally, an inheritance attorney can also help on the front end, helping you formulate an estate plan to reduce the burden and stress on your loved ones down the road. Beyond that, here are some useful next steps enumerated below:
- Inform creditors of the deceased person’s death: The first step should be to notify the Creditors of the Borrowers death. Creditors deal with the death of a debtor in various ways- some might continue to seek repayment, while others will write the debt off.
- Check if they are covered by a life insurance policy: Having informed creditor (s) of the death and given them a chance to submit a claim, the next step would be to go through the deceased person’s estate and work out whether they have enough money to pay off any outstanding debts.
If the deceased is covered by a policy, read it carefully. Policies like payment protection insurance (PPI) usually only cover short-term illness, whereas a life insurance policy may be enough to cover outstanding debts, while the rest will go to any named beneficiaries.
- Deal with outstanding debts in order of priority: As executor, you will be expected to make arrangements for any remaining debt or leftover credit agreement not covered by a policy. Make sure you deal with secured debts first, like mortgages secured against a home – they’re subject to the strictest debt collection laws. Next, priority debts like income tax and council tax arrears.
Finally, pay off any remaining unsecured debts. These include credit card debt, personal loans, and unpaid utility bills.
How does a deceased loved one debt affect my credit rating?
Except you are a named signatory to the original agreement, your credit rating will not be be affected.