A previous coworker and friend I’ll call Karen once asked me, “How will we ever pay off my father-in-law’s debt?” She confided that her in-law’s health was deteriorating and his growing debt balance was keeping her awake at night.
Karen said the problem stemmed from his irresponsible money management, despite the fact that he ran his own accounting firm for decades. She was already unsure about how to get out the debt that she and her husband owed. Now she was having nightmares about debt collectors calling to demand payment of her father-in-law’s debt in the event of his death.
Read More: The One Thing I Wish My Father Had Done
I’m glad that Karen entrusted me with her financial fear because I was able to put her at ease about who’s responsible for a deceased family member’s debt. Here are four truths I told her about it.
1. Family and Friends Don’t Inherit Debt
After you die, everything you leave behind becomes a legal entity called your estate. What happens to your estate depends on whether you die with or without a last will, as well as the state where you lived.
There must be an estate administrator, known as an executor, who puts things in order. He or she distributes personal property, handles financial accounts and pays outstanding debts and taxes.
With few exceptions, such as having co-signed a credit account with the deceased or living in a state with filial responsibility laws for an indigent parent’s medical bills, the estate is responsible for a deceased person’s debts.
Every adult should have a will that names a trustworthy executor. If you don’t, the court appoints one for you who may be a stranger that doesn’t carry out your wishes the way you would have liked.
2. Some Creditors May Not Be Paid
If there isn’t enough money in an estate to pay its debt, the executor must sell as many assets as possible. For instance, the estate may have to sell a vehicle or liquidate a brokerage account to raise money for outstanding creditors, such as credit cards, lenders and taxing authorities.
But what if there are more debts than assets in an estate? If there isn’t enough cash or property to cover debts, creditors are generally out of luck and won’t be paid.
3. Retirement Assets Are Safe From Creditors
In most states, retirement funds, such as a 401k or IRA, are safe from liquidation to pay off creditors. That means the account beneficiary would receive it, even if your estate were insolvent.
So, be sure to name primary and secondary beneficiaries on your retirement accounts and update them after key life events, such as a marriage, divorce or the addition of a child.
More on Finances After Death: The Cost of Dying in All 50 States
4. Debt Collectors Can’t Harass You
Consumers are protected by the federal Fair Debt Collection Practices Act, which prohibits collectors from using abusive or deceptive tactics. That said, even though it’s illegal for creditors to collect a deceased person’s debts from someone who isn’t responsible for them, they might try.
Creditors have a limited period of time, such as up to six months, to make a claim against an estate. If the estate is insolvent, creditors could prey on relatives in hopes they’ll feel duty-bound to pay up. As I mentioned, unless you’re a co-signer on a credit account, the outstanding balance isn’t your responsibility.
If the debt is in the deceased’s name only, creditors can’t go to family, friends or heirs to collect it. Also, creditors can’t go after property or cash that goes to heirs, such as a retirement account or a life insurance benefit.
So, if you’re concerned about how to get out of debt that your family member has left you with, remember there is no need. Arm yourself with the knowledge that a loved one’s debt is not your burden.
Read More: How to Minimize Your Estate Tax
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