By Liz Weston
by NerdWallet
Many people believe in 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 responsible for his parents’ debt. The second myth is that they can’t.
Adult children generally do not have to pay their parents’ bills, but there are exceptions. And even when a child doesn’t have to pay directly, the debt could reduce what they inherit.
Debt doesn’t simply disappear when someone dies, Whitty explains. Creditors can file claims against the estate, and these claims generally must be paid before anything is distributed to the heirs. Creditors are also allowed to contact relatives about the deceased person’s debts, even if those family members have no legal obligation to pay.
If you’re worried that your parents’ debt will outlive them, consider talking to an estate planning attorney for personalized legal advice. Here are some questions to explore.
WHEN YOU CAN AND CANNOT BE HELD PERSONALLY RESPONSIBLE
Generally, family members do not have to use their own money to pay the debts of a deceased relative unless they:
— Co-signer of a loan, holder of a joint account or otherwise agreed to be held responsible for the debt.
— Are the surviving spouse and live in a community property state or in a state that requires surviving spouses to pay debts such as medical bills.
— Were legally responsible for settling the estate and did not follow state law.
For example, if you are the executor of your parents’ estate and you distribute money to yourself or other heirs before repaying creditors, creditors could sue you to recover the silver.
SHOULD YOU FEAR ‘AFFILIATE LIABILITY’ LAWS?
More than half of the states still have “subsidiary responsibility” existing laws that could technically force adult children to pay their impoverished parents’ bills, says Letha McDowell, an estate and elder law attorney from Kitty Hawk, North Carolina.
These laws are holdovers from a time when debtors’ jails existed, says McDowell, who is president of the National Academy of Elder Law Attorneys. Their use has faded since the creation in 1965 of Medicare — the health coverage program for those aged 65 and over — and Medicaid, the health coverage program for the poor.
Filial liability laws are rarely enforced, although in 2012 a nursing home chain used Pennsylvania law to successfully sue a son over his mother’s $93,000 bill. Some legal experts have predicted more such lawsuits as long-term care costs rise, but so far that hasn’t materialized, McDowell says.
HOW CREDITORS ARE PAID – INCLUDING MEDICAID
If someone dies with more debt than assets, their estate is considered insolvent and state law generally determines the order in which bills are paid.
Legal and other fees for the administration of the estate are paid, as well as funeral and burial expenses. A temporary living allowance may be provided for spouses and dependent children, depending on state law. Secured debts such as mortgages or car loans must also be paid off or refinanced, otherwise the lender may reclaim the property. Federal taxes and other federal debts have a high priority for repayment, followed by state taxes and debts, Whitty says.
If Medicaid paid for someone’s nursing home expenses, for example, the state can file a claim against the estate or a lien against the person’s home, McDowell says. Medicaid eligibility and recovery rules can be complex and vary from state to state, so it may be worth consulting with an elder law attorney if a parent may need Medicaid. to cover nursing home bills, McDowell says.
She urges to plan appropriately “to make sure your family doesn’t end up homeless.”
Last debts to be paid include unsecured debts, such as credit card bills or personal loans. If there is not enough money to pay these debts, the creditors get a share of what is left. Only after creditors have been paid in full can the remaining assets be distributed to the heirs.
WHAT TO EXPECT WHEN COLLECTORS CALL
Often, creditors won’t even file a claim against an insolvent estate if there’s little hope they’ll recover, 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 the debt is legally owed by a survivor if it isn’t, Whitty says.
“One of the reforms that has been noticeable during my practice is that collection agencies must now affirmatively state that surviving family members are not obligated to pay the debt,” he says.
Of course, collection agencies aren’t known for always following the law. If you are contacted by an unethical or abusive collector, consider filing a complaint with the Consumer Financial Protection Bureau. You can do this, and learn more about your rights under the Fair Debt Collection Practices Act, on the CFPB website.
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This column was provided to The Associated Press by personal finance website NerdWallet. Liz Weston is a NerdWallet columnist, certified financial planner, and author of “Your credit score.” Email: [email protected]. Twitter: @lizweston.
