Inheriting Debt from a Family Member

A loved one’s outstanding debt is the last thing on anyone’s mind when a family member passes away. Learn more about inheriting debt.

Presented by: Ben Murphy, CPA, PFS™, CPFA®

“What’s yours is mine and what’s mine is yours” is a typical mantra of married couples. But when it comes to debt, that saying can be scary. More important, thinking about a loved one’s outstanding debt is the last thing on anyone’s mind when a family member passes away. Unfortunately, many people find themselves dealing with creditors and figuring out how to pay their loved one’s debts as they grieve. To avoid this situation, it makes good financial sense to consider these matters ahead of time.

Fortunately, the general rule of thumb is that spouses are not responsible for each other’s debts (in the legal sense, of course). Therefore, when agreeing to assume a liability, the borrower’s spouse can usually rest assured he or she will not be held responsible if the borrower is unable to meet his or her obligations.

There are caveats to this general rule, however. Below, you’ll find an overview of the legal intricacies and potential pitfalls associated with debt, as well as situations where you may need to be prepared to take on liability.

Community Property States

If you and your spouse reside in a community property state, your debts are likely to be considered owed by both of you, regardless of who signed for the loan. As of 2023, there are nine community property states or quasi-community property states, meaning all property and debt acquired during a marriage is considered jointly owned: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. If you live in one of these states, you could be held responsible for debts your spouse incurred. If your spouse passes away, you may find yourself responsible for debts for which you weren’t a cosigner or co-applicant.

A few important rules apply in these states for student loans in particular:

Federal student loans: If you or your spouse take out a federal student loan after getting married, the debt will likely remain the responsibility of the borrower, regardless of the state you live in.
Private student loans: Married borrowers should be far more careful when taking out private student loans, as these loans are more likely to be subject to community property legal standards.
Loans incurred prior to marriage: If you or your spouse incurred your student debt prior to entering the marriage, joint liability would likely not attach to the loans, regardless of whether they’re federal or private.

Who’s Responsible for Outstanding Inherited Debt?

Generally, the deceased person’s estate assets are used to satisfy creditor claims before being distributed to beneficiaries. If estate assets are insufficient to pay all outstanding debt, the estate is considered insolvent, and state law prioritizes the payment of the deceased person’s bills with the available assets.

In some cases, however, outstanding debts may not fall to the estate:

Cosigned or joined. If you and your spouse decide to enter into a joint debt, then, typically, you both are “joint and severally liable” for the spousal debt—meaning the creditor can come after one or both of you for the full amount owed. Likewise, if you’ve cosigned on a loan or credit card with the deceased person or owned the account jointly, you are financially responsible for that debt.
Guaranteed debts. A similar situation to cosigning, if you are the guarantor of a loan for someone who has passed away, you will owe the lender payment of any remaining balance.

What if You’re Divorced

When finalizing a divorce, a judge can order the split of not only the marital assets, but also of the debts of the parties. Generally, if a spouse has incurred a debt individually, that debt will remain with the person who incurred it; however, the judge may award assets disproportionately to the individual with the higher indebtedness if the judge determines fairness demands it or that the debt was incurred to benefit the marital household. In the case of joint debt, a judge can order that only one spouse is responsible for the debt, notwithstanding that both spouses are legally liable to the creditor.

Creditors are not bound by the terms of a divorce decree and are free to pursue an individual for a debt that a judge has ordered the individual’s former spouse to pay. If a spouse was ordered by a judge to pay a joint debt, however, and then files for bankruptcy, the bankrupt spouse is typically unable to discharge his or her obligation to the former spouse to satisfy the debt.

How Are Different Types of Debt Handled?

Credit card Again, family members are not responsible unless they cosigned on the credit card. Although debt collectors may be aggressive, they can only make a claim against the estate. If you did cosign, you will be held responsible for the debt, even if you didn’t directly incur it. However, being an authorized user on the credit card account will not make you responsible for the credit card debt.
Medical debt. If your parent qualified for Medicaid, the state may try to recover the payments made for their care. The state cannot ask you to pay, but it may be able to put a lien on your parent’s home to recover the funds or seek recovery from your parent’s estate. If a family member dies with other unpaid medical bills (unrelated to Medicaid), those bills become an estate debt. Keep in mind that many states have filial responsibility statutes that, under certain circumstances, hold adult children responsible for a deceased parent’s medical A spouse might also be responsible for a deceased spouse’s medical debts under a state’s family expense act. Be sure to understand how state law may apply in your situation.
Mortgage If you inherit a residence with a mortgage, you generally aren’t required to pay it off immediately. If you fail to make the mortgage payments, however, or cannot sell the house for a price that will pay off the mortgage, the lender will likely foreclose (or possibly agree to a short sale). If you don’t wish to own the real estate, you may disclaim it, at which point it would transfer to the next estate beneficiary.
Student loan debt. Federal programs, such as Perkins and Stafford loans, usually offer cosigners forgiveness if the borrower passes away. However, private loans may be another story. Although some lenders have started to discharge the debt if a borrower dies or becomes disabled, many demand the money owed from cosigners.
Taxes. The estate is responsible for paying any property, income, or estate taxes. Tax authorities are usually given top priority as creditors.

Don’t Be Bullied

Family members of deceased debtors—and all consumers—are protected by the federal Fair Debt Collection Practices Act (FDCPA), which prohibits debt collectors from using abusive, unfair, or deceptive practices in attempting to satisfy a debt. Under the FDCPA, collectors can contact the deceased person’s spouse, guardian, executor, or administrator to get their contact information, but they are not allowed to discuss the details of the debt. You have the right to control your interactions with these collectors. For more information, visit the Federal Trade Commission’s website.

Know Where You Stand When Inheriting Debt

Inherited debt can be a complex issue. If you find yourself in this situation, seek advice from your financial advisor and an attorney who can guide you through the probate process and work with debt collectors. Although dealing with a loved one’s death is never easy, getting your questions answered and protecting your inherited assets may make the situation a little less stressful.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Ben Murphy is a financial advisor located at Global Wealth Advisors 601 N. Marienfeld, Suite 322, Midland, TX 79701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network^®, Member FINRA / SIPC, a Registered Investment Adviser. Financial planning services offered through Global Wealth Advisors are separate and unrelated to Commonwealth. He can be reached at (325) 207-5772 or at info@gwadvisors.net.