Will you inherit your parents' debt?

There is a common misconception that children are responsible for their parents’ debt.  This concern is amplified by the statistic that nearly 40% of all seniors say they have accumulated debt in their retirement years with no plans to pay it off during their lifetimes, according to a survey by CESI Debt Solutions in Raleigh, N.C.  This generates the logical angst for heirs about inheritance of this mounting debt.  But do not worry,  there are very few situations that would leave an heir personally liable for any of his or her parents’ financial obligations.

The only exception that may come into play would be if the heir cosigned or guaranteed the debt in writing.  In that case, there would likely be a contractual obligation to pay for that outstanding debt.

Then what happens to the debt?

Creditors will have an opportunity to seek reimbursement from the decedent’s estate.  All of the decedent’s assets will be compiled into his or her estate and distributed by the decedent’s personal representative.  Creditors may be paid out of any non-exempt asset.  If the decedent’s non-exempt assets are insufficient to pay all claims in full, the personal representative is required to make payment in the following order:

  1. Costs and expenses of administration;
  2. Reasonable funeral expenses;
  3. Debts and taxes with preference under federal law;
  4. Reasonable and necessary medical, hospital, or nursing home expenses if the last illness;
  5. Debts with preference under other laws of the state, and state taxes;
  6. All other claims.

If the decedent’s non-exempt assets do not cover all of the debts then his or her estate would be deemed insolvent and the remaining creditors would likely go unpaid.  It is important for the probate attorney to accurately differentiate between exempt and non-exempt property when handling creditor claims.