My grandmother passed away recently. It was a difficult time for our family, but, thankfully, it wasn’t made more difficult by money problems. My grandmother’s finances were mostly in order, and there wasn’t any debt for my father and his siblings to worry about.
Even though debt wasn’t a problem in this case, not everyone is in such a position. Many adult children worry about their parents’ debts when they pass. If you have an ailing parent who’s in debt, it can add a worry, since you might be concerned that you will have to make good on the debt.
According to John R. O’Brien, an attorney practicing estate and probate law in Chicago, you can quit worrying about the debt issue in most cases. “The parents’ debts die with them,” he says. “If there isn’t enough money in the estate to pay off the debts, then whatever money is available can and probably should be spent for funeral, cremation, or burial expenses.”
What happens to the debts?
When someone dies, their debts now belong to their estate. It’s up to the estate to pay them. In some cases, there are enough assets in the estate to pay of the debts, and the executor of the estate makes sure this happens. In some cases, there are enough assets that, even after the debts are paid off, there is some money remaining for the heirs.
While the actual process varies from state to state, an estate is deemed insolvent if the debts against it outweigh its assets. “Here in Illinois, and I bet it’s similar in most states, creditors can file a petition to open an estate of the last parent to die in order to have available assets applied to the existing debts,” O’Brien says.
This means that the children of the deceased can walk away from the estate, or do as little as possible with it. The creditors can take on the responsibility for trying to convert what assets there are to some sort of partial repayment of the debt. “There is no reason for the deceased’s family to open the estate, since the creditors will just take all of the assets anyway,” O’Brien continues.
For the most part, the debts are just written off by the creditors. If they can’t get enough to cover what’s owed, or if they don’t think it’s worth the trouble to try, then they will write off the debts as losses. They should come after you or your siblings to “make good” on debts that your parents had. The only exception is if you actually agreed to some of the responsibility.
Options for an underwater mortgage
My grandmother’s house has been paid off for decades, so that wasn’t an issue for my dad and his siblings. However, many others aren’t in that position. “Some survivors may want to do a few things just to honor their parents’ memory,” says O’Brien. “For example, if the parents owned a house that is worth much less than the mortgage balance, they may want to maintain the property at a minimal level as a courtesy.”
This minimum level of maintenance might be kept up until something can be done about the house. O’Brien says that there are options when a home’s owner dies with negative equity. It’s possible to quit-claim the interest in the property, essentially releasing it to the bank so the bank can sell it quickly, and avoid the foreclosure process. Another possibility is to arrange a short sale. “This allows survivors some control over the process. They can refer business to a favored real estate agent, and have a little control over who owns and lives in mom and dad’s old house, if that matters to them,” O’Brien says.
However, these are all options. “If the survivors live far from the property, or don’t have any reasonable way to take care of it, or try to market it, they don’t have to,” he continues.
When you have to take responsibility for your parents’ debts
“The only exception to all this is when you have co-signed, or otherwise agreed to assume responsibility, for a particular obligation,” O’Brien explains.
So, if you co-signed on your mom’s mortgage, or helped your dad out by co-signing on his auto loan, then you would be responsible for the debt upon their passing. Any time you co-sign on a loan, you are accepting responsibility for that loan. So if you have a joint bank account that is in the red, or if you got a joint credit card with one of your parents, then you will have to repay the loan.
This is one of the reasons that it’s important to avoid co-signing on a loan, especially if you are concerned about the borrower’s ability to repay it in full. If your name is in the paperwork, and you have legally bound yourself for responsibility, you can’t get out of it. If you don’t make arrangements to take over the payment of the debt, then your own credit could be adversely affected by situation.
It’s never fun to go through the process associated with the death of a loved one. This is especially true when money troubles are involved. However, as long as you don’t co-sign on a loan or other credit obligation, you won’t have to worry about repaying your parents’ debt – that’s up to the estate.