| Gary Foreman is a former Certified Financial Planner (CFP) who currently writes
about family finances and edits
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Gary,
I've heard that when parents are in debt and they die the debts are
left to the children to pay off. Is this true?
My parents had gotten
a divorce a few years ago. My mom is doing well because she is a
saving queen. My dad had remarried two years ago. His wife does not
work but loves to spend money. So now they have a $20,000 debt.
If
my father dies, his wife is responsible for the debt, right? What
happens after she dies and there is still that debt?
Also, what
happens if she dies first, and then my father--who gets the debt?
Judy
Judy asks a question that comes up
often. Can someone die and 'leave' their debts to you? The answer is
no. Parents can't leave their debts to you. In fact, they can't even
leave their debts to their spouse.
Typically a will controls financial
affairs after a person's death. A will distributes assets, not
debts. But, before any money can be distributed to heirs, all the
debts must be paid. So enough assets are sold to pay for any debts
that remain. Only after the debts are paid will the remaining assets
be distributed among the beneficiaries of the will.
The key point to remember is that you
are only responsible for debts that you contractually created. There
are certain circumstances that would put Judy at risk for her dad's
debt. But she would have had to do something to cause that
responsibility.
Suppose that Judy's dad asked her to
co-sign a loan. Signing would make her responsible for the debt. Not
only if her Dad died, but also if he failed to make a payment. But
she shouldn't be surprised. When you 'co-sign' a loan, you do just
that. You put your signature on the loan application.
A similar situation occurs with a
joint credit card. A joint account allows anyone named on the
account to use it to create a debt. But it also means that everyone
listed on the account is responsible for the entire debt that's
created.
Suppose Judy had a joint card with
her dad. And he was the only one using the card. Any debts he left
at death would be Judy's. But once again, it should be no surprise
to Judy. She signed the joint application for the account. And it's
her responsibility to be aware of whether it's being paid off or
not.
It wouldn't be unusual for Judy's dad
and step-mother to have a joint account. In that case the survivor
would be responsible for any balances on the account.
Joint credit card accounts often
create problems in a divorce. Often a couple has a joint account
before the divorce. The credit card company isn't going to split the
bill just because a couple throws in the towel. As far as they're
concerned, both the ex-husband and wife are responsible for the
entire amount of the bill until it's paid. And while a court can
instruct one party to pay, sometimes it still doesn't happen.
Another way that people end up paying
someone else's debt is when you let someone use your credit card.
Again, it should be no surprise when the bill comes in.
So what happens to the debts of
someone who dies? The credit card company will first try to collect
from the estate. As mentioned earlier, assets will be sold to pay
the bills. Then, if the account was a joint account, any survivors
will be left holding the bag. If the debt belonged solely to the
deceased, then the credit card company will end up eating the debt
if there aren't enough assets to cover it.
But Judy isn't completely off the
hook. She might still want to advise her dad to control his
spending. As her father and step-mother get older they could have
trouble keeping up with the minimum payments. And, once they fall
behind things will get tough. Credit card companies are quick to
bump up interest rates when you miss a payment.
And that would be trouble. Judy's
father will probably be living on a fixed income during retirement.
So the payment that was a struggle at 12% interest becomes
impossible when the interest rate goes to 20%. And unless they have
some assets that can be sold to reduce the debt, the minimum
payments will dominate their finances.
And that's where Judy comes in. I
don't know her relationship to her father, but it would be awfully
hard to watch a parent struggle to put food on the table. Even if
they caused the problem by foolish past spending.
It actually would be interesting if
parents could 'leave' their debts to someone after they die. I
suspect that many children would treat their parents much better if
that were the case. Instead of parents threatening to cut a child
out of their will, parents could run up large debts and threaten to
put a child into their will! Never mind! It's a good thing that the
law doesn't read that way. Somehow I don't think that it would be
good for family relations.
--End--
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