Unfortunately, there's a lot of money surrounding a death. There's dividing up the estate, paying for the funeral, and tying up loose affairs. You might well be wondering if you're liable for your deceased parents' debts. The good news is this: you probably aren’t. But it’s good to know who is.
Your parents’ estate
Most likely, your parents made a will and appointed a trusted friend or family member as the executor of that will. (In the case that no will exists, the state gets involved.) If your parents do pass away and leave debt, the executor has the responsibility of letting any creditors know of their death.
Once the creditors are notified, they can submit proof of the debts and present claims to your deceased parents’ estate. The estate is the net worth or the sum of their property owned at the time of death. When the will is in probate—the first step of the legal process to resolve final debts and distribute the deceased’s property—the creditors have a stake in collecting money for the debts. The estate is the source for repayment.
What if there isn’t enough?
First, it’s good to know the order in which debts are paid. The first are secured debts, or ones with assets attached such as a house or car, and the second are unsecured debts, such as credit cards. If the estate does not have enough money to pay off the creditors, then the estate can be deemed “insolvent,” the equivalent of bankruptcy for the estate. The beneficiaries of the estate unfortunately receive nothing.
Generally, there is no personal liability if the estate is insolvent. Creditors usually close the account and forgive the debt. In the event that they don’t, and credit card debt is continually demanded, speak to a lawyer before paying anything.
» MORE: How to pay off debt
When am I liable?
There is one definite circumstance that can make you liable for your parents’ debt: cosigning with either of your parents — on a loan, a credit card, etc. If you cosigned the application for a joint account, you entered into a binding contract and continue to be equally responsible for the debt. Now there’s a difference between a cosigner and an authorized user of your parent’s credit card. If you are the latter, you do not have any legal responsibility for debt accrued on the card.
In community property states, debts accrued during marriage can be considered shared, but this doesn’t apply outside of marriage.
What to do about credit card debt
If you discover credit card debt on your deceased parents’ cards, the last thing on earth you want to do is use them. Cut the cards up immediately and mail them to the credit card company with a statement of the date of the death. The next step is to reach out to the three credit reporting agencies, Equifax, Experian, and TransUnion, to ask them to close the reports on your parents.
If a credit card company in particular continually harasses you and/or adds fees or penalties after the will has begun its probate process, notify a lawyer because such actions are illegal according to the 2009 Credit CARD Act. Broadly speaking, if any creditor calls you at odd hours, says that you’re breaking the law without any explanation, or otherwise harasses you, you are protected by the FTC-enforced Fair Debt Collection Practices Act.
Do I still benefit from my parents' life insurance?
Life insurance is not considered part of the estate and so is safe from creditors. Since the insurance company pays the benefits directly to the survivor, money isn’t placed in the deceased’s name and so isn’t in the estate. So, yes, you would still receive the benefits from your parents' life insurance.
The exception to this occurs if your deceased parents named the estate as the beneficiary, instead of an individual, i.e. you. This is not desirable, since the creditors can now collect insurance money if it helps pay more of the debts.