What Should I Do About My Parents’ Debt?
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Managing your finances is a complicated endeavor with many independently moving parts.
You may have children to support, day to day bills to cover, debts to pay off, and retirement to plan.
Throwing even more into the mix, you may come to a point where you need to intervene in your parent's financial situation.
When your parents hold a lot of credit card debt or other consumer loans and insufficient funds, they could be in for some not-so-golden years ahead.
While the statistics on the amount carried vary by source, having significant debt after age 50 (including mortgage) is incredibly common.
When you couple this with a low savings balance, the result is an underfunded retirement. And that's for those with any retirement savings at all.
For those with all debt and no savings, the situation becomes much worse.
What Ultimately Happens to A Parent's Debt?
The good news? In most cases, you won't be personally liable for the debt your parents leave behind when they pass away.
However, there are two notable exceptions where you would be personally responsible:
- You cosigned on the debt (note: an authorized credit card user is NOT a cosigner!)
- You are the executor of the estate and fail to follow the probate protocol
It's therefore critical to think it through before cosigning on any debt and to work closely with your parent's estate lawyer as you go through the probate process.
Important Note: Check your parents' state's laws regarding medical debt, if applicable. Under Filial Responsibility laws, health care providers in numerous states may be able to bring suit against children if their parent's estate cannot cover their medical bills.
When One Parent Dies
It's important to note that if your parents are married and one of the pair dies, the remaining spouse may be legally liable for the other's debt.
If they live in the community property states of AZ, CA, ID, LA, NV, NM, TX, WA, or WI, the surviving spouse will most likely be responsible for the deceased spouse's debt.
Should your parents not reside in a community property state, your remaining parent likely is not responsible for debt incurred in the departed parent's name only.
However, if they were a joint account holder with a credit card company and not just an authorized user, they are liable for any remaining credit card debt.
If the remaining parent is liable for any joint debt or the deceased spouse's debt, and there are insufficient assets to cover the liabilities, they may be forced to sell their home. This may mean they move in with you (or another family member).
Strive to understand their state laws and financial situation in advance.
So if you're not personally on the hook for their unpaid debts, why should you care?
There are two main reasons:
- The piper still needs payment
- It impacts your parents' current quality of life and long-term care
Pay the Piper
Just because you don't have a legal responsibility to pay the bills or won't inherit the debt, it doesn't negate its existence. Your parent's estate will incur the cost.
That means all of your parent's creditors, including tax jurisdictions, must be satisfied through the probate process, which determines the order for paying creditors before you can claim anything remaining as an inheritance.
Depending on the state of residence, the probate process can last several months to a couple of years.
If the estate runs dry, any remaining creditors will go unpaid. However, the repossession of cars and foreclosure of homes can occur if lenders stop receiving payments.
When you want to keep those assets, you must keep paying on the accounts and pay property taxes to avoid losing them.
Additionally, you may be forced to liquidate real estate to satisfy a debt the estate can't cover otherwise, including unpaid medical bills due to filial responsibility laws in some states.
On a positive note, creditors typically cannot seize life insurance proceeds or retirement account funds as long as a designated beneficiary is still living.
If there isn't a living beneficiary or they failed to declare one, it's possible for the funds to be deemed as part of the estate and used to pay off debt. Therefore, it's essential to ensure beneficiaries are kept up to date.
Preserve Parents' Quality of Life
If your parents are in poor financial standing and shouldering a lot of debt, they are probably under extreme stress.
They might have collection agencies calling them daily or sending them threatening correspondence.
They may desperately want to rectify this situation but don't have sufficient means or know-how.
Worse yet, they may be struggling to cover the cost of life's necessities. They may ultimately face eviction or foreclosure or have to make impossible choices between medicine, food, or electricity.
Even if their financial situation is 100% a result of their own poor decisions or elder fraud, they shouldn't have to go without the basics.
Financial struggle is a genuine concern for anyone. But, for an aging population, it becomes even more critical.
Depending on their health, your parents may not be able to work.
When they find themselves in a situation where their bills exceed their savings and social security (if they're old enough to collect), and they cannot earn more money, they'll continue to go into debt or go without the staples of life.
How to Help Now
If your parents are in a bad place financially (or you suspect they are), you should plan to have a conversation with them about their situation.
While it certainly can make for an uncomfortable, role-reversed discussion, it's essential to at least try having a dialogue.
This is especially true if your parents are single or if one of them is widowed, as they will likely have access to fewer resources.
When you approach the topic from a place of genuine concern for their well-being, you may be able to ease some of the potential defensiveness or awkwardness.
Explain you want to ensure their basic needs are being met and that you're there to help in any way you can.
If the situation isn't urgent, it may be helpful for you to model good financial behavior. Create a budget. Pay off your debt. Get your estate planning documents in order.
Talk to your parents about your money wins and ask how you can help them check off these boxes as well.
- Recommended Reading: Guide to Caring For Elderly Relatives
Involve your siblings in this process, if applicable. Should your parents require financial support, it's easier to share the load among multiple children, if possible.
Creating a team with your parents' well-being in mind can lead to more ideas to help them and provide emotional support for each sibling.
Also, should the worst-case scenario strike and your parents cannot afford to live independently, the family unit can decide who they should move in with.
Remember, though, if you or your siblings are just financially getting by yourselves, it doesn't make sense for you to attempt to provide for your parents.
However, you can help them connect with public assistance programs to cover their necessities.
Additionally, combining households could be financially advantageous for all parties depending on the situation. (Considerations for sanity should not be overlooked, though!)
Even if you can provide your parents with some cash flow, be open to seeking help from accountants, credit counselors, a Certified Financial Planner, or other financial professionals.
Together you may be able to make financial decisions and create a plan of action to benefit the family long-term.
So Should I Pay Off Their Debt?
This is an incredibly personal and nuanced decision. If you don't have the means to do so, it's a definitive no. You shouldn't put yourself or your household at risk for this.
However, if you are in a solid financial position, there are a few reasons why you might decide to pay your parent's creditors:
- Your parents have financed property (like cars or houses) you want when they pass
- You feel like you will improve their lives by relieving them of the financial stress
- You feel like paying the debt off is the right thing to do in general (whether they're alive or not)
Carefully consider the impact of paying off this debt on your finances both now and long term before making any commitments.
And, as long as your parents are capable, involve them in the decision-making process, deferring to their wishes.
Cleaning your parent's financial slate could be a great thing. Or it could turn into future strain for you and additional emotional stress for your family.
What to Do When They Pass
Although your parents passing will be a difficult time of grief, it's essential to handle their finances strategically and promptly. Here are some necessary actions to take:
- Contact their estate/probate lawyer – you'll want professional advice right away
- Notify creditors of their death to freeze accounts (they may require official death certificates)
- Determine the assets held
- Determine the debts outstanding – and plan for their reconciliation
- Have beneficiaries of life insurance policies and retirement accounts file claims immediately
- Prepare to submit their final tax return – and be sure it's on time
Protection for You
Losing a parent is sure to be an overwhelming and emotional time. The last thing you want is to deal with inheriting debt and the stress of debt collection calls. It's therefore important to know your rights.
According to the Federal Trade Commission (FTC), you have protection from the Fair Debt Collection Practices Act (FDCPA). That means:
- Debt collectors cannot legally discuss the debt with you if you're not the executor or authorized agent of the estate. They may only ask you how to reach the estate.
- If you are the executor, you may request the debt collectors stop contacting you. This must be done in writing and, once received, be honored by the debt collector.
- This does not, however, absolve you from having to carry out the duties of the estate. The debt collector may still contact you to inform you of their actions, such as suing the estate.
Wrapping it Up
While challenging, if you start a money dialogue with your parents, you'll be on your way to smoother financial sailing, now and when they pass away.
Even if your parent's financial situation isn't dire, you should know what you'll face when they pass.
At a minimum, encourage your parents to prepare estate documents and leave crucial financial information in a secure but known location for easy reference when the time comes.
Recommended: In Case of Emergency Binder
Every family's situation and estate planning needs are different. This article is only meant to provide some introductory information.
Since state and Filial Responsibility laws vary, we recommend you consult with a reputable estate attorney before and during the probate process.
Article written by Laura