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Inheriting Debt: What You Need to Know

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When a loved one passes on, financial burden can increase the family’s hardship and suffering. With so many life expenses ranging from mortgages to car loans to credit card debt, student loans, and everything in between, it’s a common worry to think about the future of large debts and whether or not that debt is inherited. Before worrying too much over inheriting debt, it is important to understand what actually happens when a loved one passes on and leaves a large debt behind.

So what happens when someone with a large amount of credit card debt dies? Is the debt left behind for their families or surviving spouse to pay off? Is the debt forgiven? Is it settled somehow, along with the funeral arrangements?

The answer is, it really depends.

“Whether you inherit debt or not depends on the state you are in (community property or common law states),” says Assistant Professor Mitzi Lauderdale from the Undergraduate Program Director in the Division of Personal Financial Planning at Texas Tech University. “Debt is first settled by the estate of the decedent and if assets are titled appropriately to avoid probate then those assets are protected from creditor collection.

“The question then is âÃÂÃÂwhether or not the beneficiaries will take on the remaining debt.’ In a common law state, if the debt is solely the testator’s and not in the name of anyone else, the debt will be written off by the credit card companies. In community property states, the answer will vary a bit. All income earned and assets acquired during the marriage are considered to be owned half and half. For the most part, the debt is considered to be half and half as well. Therefore, if there are not enough assets in the probate estate to cover the debt, then the surviving spouse will then be responsible for the debt.”

“In general, debt is not inherited, much as the collectors would like it to be,” adds David Leibowitz, founder of Lakelaw and board certified business and consumer bankruptcy lawyer. “When a person dies, a probate estate is created of any assets not otherwise disposed of through inheritance, like jointly owned property. Only estate assets can be used to satisfy debt of a decedent.ÃÂàOtherwise, the debt is discharged.ÃÂàIf the probate estate is insolvent, debts are paid pro-rata among creditors who file timely claims. Priority claims such as taxes get paid first.”

Leibowitz explains that some states like Illinois have a family expense doctrine that suggests the surviving spouse pay certain debts like medical debt, but it is not universally applied. He adds that states like California and Wisconsin (and states where there is community property) do require the surviving spouse to be liable for community debt.

“However, heirs like children are not bound to debts of their parents in general – unless they are jointly obligated as a matter of contract,” he says. “Creditors who try to collect such debts may be subject to claims under the Federal Fair Debt Collection Practices Act as well as local state consumer protection laws.”

Texas Tech University Personal Financial Planning instructor Robert Barnhill agrees. As much as we might be worried over inheriting our parents’ debt, that is generally never the case.

“Generally, heirs do not inherit credit card debt,” he says. “If the decedent has debts at death, the decedent’s assets are used to pay the debts. Heirs only inherit assets after the debts are paid. If there are insufficient assets to pay the debts, the creditors get stuck and the heirs do not inherit anything. The heirs do not owe the decedent’s creditors. If the heirs are on the credit card, then the credit card debt is their debt, too. However, they are not inheriting debt. It is their debt in the first place. At least, that’s how it’s done in Texas.”

About the Experts:
Mitzi Lauderdale is an assistant professor from the Undergraduate Program Director in the Division of Personal Financial Planning at Texas Tech University. Robert Barnhill is a Texas Tech University Personal Financial Planning instructor. For more information about Texas Tech, please see www.ttu.edu.

David Leibowitz is founder of Lakelaw and a board certified business and consumer bankruptcy lawyer in the Northern Illinois or Southern Wisconsin area. For more information about Lakelaw, please see www.lakelaw.com.

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