Dealing With Debts After Death

A few years ago, the adult daughter of a deceased client of Indianapolis estate attorney Brett Carlile showed up in his office, distraught. After her father's death, she discovered he had dozens of credit cards, with debts totaling nearly $40,000. She was stunned. "My dad didn’t live like this," she told Carlile.

Usually, when a person dies, his or her estate owes the debt. Estate assets used to repay the debt eat into the amount left for heirs. And, if there's not enough money to cover it, the debt goes unpaid. For unsecured credit card debt, children typically don't inherit a parent's unpaid balance, regardless of the amount or purpose of the spending, says April Kuehnhoff, staff attorney with the National Consumer Law Center (opens in new tab). Only a child who is a joint holder on the credit card would be liable.

Retirement plans with a named beneficiary, such as a child, can't be touched by creditors of the deceased, says Neil Brown, a wealth manager with Burkett Financial Services (opens in new tab), in West Columbia, S.C. But if the deceased parent named the estate as beneficiary of an IRA or 401(k), creditors can take first crack at it to collect the late parent's debts, he says.

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For a parent's federal student loan or Parent Plus loan (opens in new tab), the outstanding debt is canceled upon death, says Mark Kantrowitz, a financial aid expert with Cappex.com (opens in new tab), a college search website. But the Education Department recently has required the borrower's estate to pay taxes on the forgiven debt.

For co-signed private student loans, some lenders are calling in the loans even when children are current on payments. Check the loan contract to be sure the lender has the right to do so. They may try to charge the entire balance against the parent's estate, or attempt to collect it from the co-signer heir.

If your parent dies with a mortgage and you want to keep the house, you can try to arrange to take over the payments. Or you can sell, pay off the balance and pocket any profit. If the house is worth less than the mortgage amount, the creditor is left with the unpaid debt, not you, says Theresa Pulley Radwan, a professor at Stetson University College of Law.