By Jim Miller
Dear Savvy Senior,
What happens to a person’s debt after they die? My mother has taken on a lot of medical and credit card debt over the past few years and I’m worried that my brother and I will be responsible for it when she dies. What can you tell me?
In most cases when a person with debt dies, it’s her estate, not her kids’, that is legally responsible. Here’s how it works.
When your mom dies, her estate – which consists of the stuff she owns while she’s alive (home, car, cash, etc.) – will be responsible for paying her debts. If she doesn’t have enough cash to pay her debts, you’ll have to sell her assets and pay off her creditors with the proceeds.
Whatever is left over is passed along to her heirs as dictated by the terms of her will, if she has one. If she doesn’t have a will, the intestacy laws of the state she resides in will determine how her estate will be distributed.
If, however, she dies broke, or there isn’t enough money left over to pay her “unsecured debts” – credit cards, medical bills, personal loans – then her estate is declared insolvent, and her creditors will have to eat the loss.
“Secured debts” – loans attached to an asset such as a house or a car – are a different story. If she has a mortgage or car loan when she dies, those monthly payments will need to be made by her estate or heirs, or the lender can seize the property.
There are, however, a couple of exceptions that would make you legally responsible for her debt after she passes away. One is if you are a joint holder on a credit card account that she owes on. And the other is if you co-signed a loan with her.
These same debt inheritance rules apply to surviving spouses too, unless you live in a community property state – Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin.
If your mom has any IRAs, 401(k)s, brokerage accounts, life insurance policies or employer-based pension plans, these are assets that creditors usually cannot get access to. That’s because these accounts typically have designated beneficiaries, and the money goes directly to those people without passing through the estate.
Settling Her Estate
You also need to be aware that if your mom dies with debt, and she has no assets, settling her estate should be fairly simple. Her executor will need to send out letters to her creditors explaining the situation, including a copy of her death certificate, and that will probably take care of it. But, you and your brother may still have to deal with aggressive debt collectors who try to guilt you into paying.
If your mom has some assets, but not enough to pay all her debts, her state’s probate court has a distinct list of what bills get priority. The details vary by state, but generally estate administrating fees, funeral expenses, taxes and last illness medical bills get paid first, followed by secured debts and lastly, credit card debts.
If you have questions regarding your situation, you should consult with a consumer law attorney or probate attorney. Or, if you just need a question or two answered, call your state’s legal hotline if available (see LegalHotlines.org), or legal services provider.
Jim Miller is a contributor to the NBC Today show and author of “The Savvy Senior” book.