Every Friday, I answer a reader’s question. If you have a question, you can contact me.
I received the following question via email:
…questions about family members, their debt and what happens to that debt if they die. In the US, if parents die with a lot of debt (credit cards etc…) what happens to it? Are we as the kids going to be responsible for that? Any insight on this?
First, you should know that I am not a legal professional, so you should consult a lawyer to get a clear response for your exact situation. As always, I cannot be held liable for the advice I give.
Gotta love the legal stuff, eh?
In the United States, debt is not transferable. The only way a person can be in debt is if they have agreed to it by signing their name.
The short answer to your question is whatever your parents own will be used to pay off the debt they owe. Furthermore, your parents’ poor credit standing does not have any impact on your credit score.
In a case where parents do not own much, but owe a lot, you can expect that you won’t get an inheritance. However, at least you can know that you won’t have the burden of paying their financial obligations once they die.
Children are not responsible for the spending habits of their parents.
Dave Ramsey often says, “What you own stands good for what you owe.”
Credit Card Debt And Death Example:
Old Man Debt and Old Lady Borrower own a house that appraises for $150,000. This is the only asset they have and they have no savings. In addition, this couple also had $60,000 in credit card debt, $40,000 in car loans, and $125,000 mortgage.
The total of what they own = $150,000
The total they owe = $225,000
In this case, $150,00 will be paid towards the $225,000.
One of two things will happen with the house. First, the house will be sold ($150,000) and the proceeds will be given towards the $225,000 they owe to creditors. The other option is that you could buy the house for $150,000 and the money from the sale of the home would go towards paying off $225,000.
It is important to note that typically official homeownership cannot be transfered until the mortgage has been paid off.
So, here’s an example,
Mediocre Mom has a house that appraises for $150,000. She also owes $40,000 on the house. In the will, you are supposed to get the house. Once again, one of two things will need to happen. Either you pay off the remaining $40,000, (you can get a mortgage in your own name) or you sell the house and keep the $110,000.
But, you’re not completely free and clear
Debt Collectors Make Their Own Rules
Be forewarned. Just because someone cannot legally collect a parents’ debt does not mean they won’t try.
Think about it. You’re vulnerable. You’re grieving. And you’re an honorable person. Someone is going to do their best to get you on the phone and convince you that you should pay mom and dad’s bills. They’ll talk to you about morality, ethics, and obligation. They’ll lie and make up stories. Basically, anything they need to do to help collect a debt you do not legally owe.
Reader’s question: Should you pay off parents’ debt out of moral obligation? Has anyone had an experience where a collector tried to collect money you did not owe?