Will You Inherit Your Parents’ Debt?

Death and debt: both are unpleasant subjects by any means. But at one point or another in your life, you must have considered the possible scenarios when your parents will die broke. Will you inherit their debt?

To cut all the many answers short and relieve your worries, keep this in mind: Children are not legally or ethically liable for their parent’s debt, although debt collectors will try to make them think they are. The only exception is if someone cosigned a loan or credit card with them. If a person leaves an estate (such as a house or bank account), creditors can attach that, and they will take their cut before the heirs can inherit it.

Precautions:

The safest best is not to be a co-signer, but if you must be for an aging parent, first quantify the total dollar amount you would be out should a default or death happen. Additionally, you should also confirm the primary guarantor has the appropriate amount of liquid assets to cover the obligation in the unfortunate event of default or death.

If your parents’ entire estate is put into a trust, you might feel pretty confident that the $$$ will simply flow to you and your parents’ debt will just be forgotten. This is not the case. Trusts do have many asset-protection and estate-planning advantages, but in the event of a loan default (e.g., death), there are ways for this veil to be lifted. For instance, the creditor may learn about the trust and get a court order to open up the trust and reclaim any amounts owed, especially if the bulk of the trust was started by the original debtors (e.g., your parents). Before spending a red cent of the inheritance, verify if your parents do not owe anything. The good part is that with the added time, if you discover there are debts, the trust can provide some protection against a forced, involuntary liquidation of the trust assets.

When collectors starts calling

If you start getting collection calls after your parents’ death, you need to determine three things: is that debt valid; is it within the statute of limitations (the time limit that creditors and collection agencies have to collect on a debt), and are you in any way liable for it?

If a collection agency insists that you have a “moral obligation” to repay your parent’s debts, take a moment to savor the irony of being lectured about morals by a clearly unethical collector, and I tell you, it is okay to hang up.

The creditors only want to get paid, and they do not care how. So whether or not you are obligated to pay none, some, or all of the debt is up for discussion. Get a lawyer!