Inheriting Debt: How Can Your Parents' Credit Affect You?

By NerdWallet  AUG 05, 2013 2:30 PM

Your parents' spending habits may reduce the size of your inheritance.

 


Financially, senior citizens aren’t doing so hot. The average debt among people 65 and older rose 83% between 2001 and 2010 -- much of it thanks to mortgages. Outstanding balances, of course, have consequences not only for the indebted individual but also for the family and the heirs as well. When a parent passes away, the children are left to wade through the financial wreckage.

Do we inherit our parents’ debt? What precautions can we take? How do we protect ourselves from collectors? This article discusses debt inheritance and how to best prepare for the death of an indebted parent.

Is it possible to inherit debt?

Take a sigh of relief. By and large, the answer is no. For the most part, debts die with the individual. However, debts can annihilate inheritances, and there are few exceptions to the rules.

When a person dies, the executor sells off the deceased’s assets to pay off as many debts as possible. Payments are made in the following order:

1. Secured debts

2. Unsecured debts

3. Inheritances as defined by the will

When a debt is “secured,” it has physical collateral that guarantees the balance. These are debts like mortgages and car loans. Unsecured debts don’t have physical collateral. The most common example is credit card debt.

Only once all debts have been subtracted from the estate do the heirs get their inheritance. If the estate’s assets are not enough to pay off the debts, the creditors take a loss, and nobody is legally bound to pay the debts.

Here are a few of the major debts and how they are handled after a death:

Situations where you CAN inherit debt

Though we’re usually protected from inheriting debt, there are a few instances when we will be held legally responsible for paying off money owed:
Avoiding sticky situations

The first step is the hardest. Talking to your parents or children about death and debt can be difficult, but it must be done. Make sure there is a solid estate plan in place; consult a professional if necessary. You may want to open an irrevocable trust, which removes all original rights of ownership to the assets and guarantees the trust to the beneficiary. Simply gifting away all assets before death doesn’t always work because creditors have the right to seize property transferred for the sole purpose of avoiding creditors.

Whatever the circumstances, know your rights. Debt collectors can be ruthless and persistent even when you’re under no legal obligation to pay off the remaining sum. Don’t feel bad about hanging up on collectors and writing a letter of to the agency if phone calls persist. If you feel you are being harassed, don’t hesitate to file a complaint with the FTC.

Editor's note: This story by Stephen Vanderpool originally appeared on NerdWallet

To read more from NerdWallet, see: 

Paying Too Much for Health Care? How to Lower Your Medical Costs 

How Much Should I Save? How to Create the Ideal Budget – and Stick With It

Detroit’s Bankruptcy: The Story Behind the Filing
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