How your parents’ debt could outlive them

Many people believe one of two common myths when a parent dies in debt, says Chicago estate planning attorney Michael Whitty. The first myth is that an adult child will become liable for their parents’ debt. The second myth is that they can’t.

Adult children typically don’t have to pay their parents’ bills, but there are exceptions. And even when a child doesn’t have to pay directly, debt could reduce what they inherit.

Debt doesn’t simply disappear when someone dies, Whitty explains. Creditors can file claims against the estate, and those claims usually have to be paid before anything is distributed to heirs. Creditors also are allowed to contact relatives about the dead person’s debts, even if those family members have no legal obligation to pay.

If you’re concerned that your parents’ debt might outlive them, consider talking to an estate planning attorney for personalized legal advice. Here are some issues to explore.

Liability

Generally, family members don’t have to use their own money to pay a dead relative’s debts unless they:

„ Co-signed a loan, were a joint account holder or otherwise agreed to be held responsible for the debt.

„ Are the surviving spouse and live in a community property state or a state that requires surviving spouses to pay debts such as medical bills.

„ Were legally responsible for settling the estate and didn’t follow state law.

For example, if you’re the executor of your parent’s estate and distribute money to yourself or other heirs before paying off creditors, the creditors could sue you to get the money back.

‘Filial responsibility’ laws

More than half of the states still have “filial responsibility” laws on the books that technically could require adult children to pay their impoverished parents’ bills, says estate and elder law attorney Letha McDowell of Kitty Hawk, North Carolina.

These laws are holdovers from a time when debtors prisons existed, says McDowell, who is president of the National Academy of Elder Law Attorneys. Their use has faded since the 1965 creation of Medicare — the health coverage program for people 65 and over — and Medicaid, the health coverage program for the poor.

Filial responsibility statutes are rarely enforced, although in 2012, a nursing home chain used Pennsylvania’s law to successfully sue a son for his mother’s $93,000 bill. Some legal experts have predicted more such lawsuits as longterm care costs rise, but so far that hasn’t materialized, McDowell says.

How creditors get paid

If someone dies with more debt than assets, their estate is considered insolvent and state law typically determines the order in which the bills get paid.

Legal and other fees for administering the estate are paid, as well as funeral and burial expenses. A temporary living allowance may be provided for dependent spouses and children, depending on state law. Secured debt such as mortgages or car loans must also be repaid or refinanced, or the lender can claim the property. Federal taxes and other federal debts have a high priority for repayment, followed by state taxes and debts, Whitty says.

The last debts to be paid include unsecured debt, such as credit card bills or personal loans. If there’s not enough money to pay those debts, the creditors get a share of whatever is left. Only after creditors are paid in full can any remaining assets be distributed

to heirs.

When debt collectors call

Often, creditors won’t even file a claim against an insolvent estate if there’s little hope they’ll collect, Whitty says. But that doesn’t mean they won’t ask surviving family members to pay.

Legally, debt collection agencies are allowed to contact a surviving spouse or executor to request payment, and to contact relatives to ask how to reach a spouse or executor. However, collection agencies aren’t allowed to say that the debt is legally owed by a survivor if it isn’t, Whitty says.