Managing your finances is a complicated endeavor with a lot of independently moving parts.
You may have children to support, day to day bills to cover, debts to pay off, and retirement to plan. And, to throw even more into the mix, you may come to a point where you need to intervene in your parent’s financial situation.
If your parents are holding a lot of debt, they could be in for some not-so-golden years ahead.
While the statistics on the exact 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.
So What Ultimately Happens to A Parent’s Debt?
The good news? In most cases, you won’t be personally liable for 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.
Note: You may also want to check your state’s laws regarding your parent’s medical debt, if applicable. Providers may be able to bring suit against you if the estate is unable to cover those 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 one of those states, your remaining parent likely is not responsible for debt incurred in the departed parent’s name only.
If the remaining parent is liable for the deceased spouse’s debt, and there are insufficient assets to cover the liabilities, they may be forced to sell their home and move in with you (or another family member).
Their state laws and financial situation should be understood and accounted for in advance.
So if you’re not personally on the hook for their debts, why should you care?
There are two main reasons:
- The piper still needs payment
- It impacts your parents current quality of life
Pay the Piper
Just because you don’t have to pay the debt, doesn’t negate its existence. Your parent’s estate will incur the cost.
That means all of your parent’s creditors, to include 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, 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. If you want to keep those assets, you will need to keep paying on the accounts to avoid losing them.
Additionally, you may be forced to liquidate real estate to satisfy a debt the estate can’t cover otherwise.
If there isn’t a living beneficiary or no one was ever declared as 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 extremely stressed.
They might have debt collectors calling them every day or sending them threatening correspondence. They may desperately want to rectify this situation, but don’t have the means or the 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 real 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.
If 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 will 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 important to at least try to have 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.
If 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’re wanting to ensure their basic needs are being met and 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 own debt. Get your estate documents in order.
Talk to your parents about your money wins and ask how you can help them check off these boxes as well.
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 who has your parents’ well-being in mind can lead to more ideas to help them as well as emotional support for each sibling.
Also, should the worst-case scenario strike, and your parents cannot afford to live on their own, the family unit can decide together 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.
You can, however, help them get connected to public assistance programs to get their necessities covered.
Additionally, depending on the situation, combining households could be financially advantageous for both parties. (Considerations for sanity should not be overlooked, though!)
And, even if you can provide your parents with some cash flow, be open to seeking help from accountants, credit counselors, or other financial professionals. They may be able to 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, then it’s a definitive no. You shouldn’t put you or your household at risk for this.
However, if you are in a strong 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 important to handle their finances in a strategic and timely manner. Here are some necessary actions to take:
- Contact their estate/probate lawyer – you’ll want the 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 the stress of debt collection calls. It’s therefore important to know your rights.
According to the Federal Trade Commission (FTC), you are protected by the Fair Debt Collection Practices Act (FDCPA). That means:
- If you’re not the executor or otherwise authorized agent of the estate, debt collectors cannot legally discuss the debt with you. 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 action they are taking, 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 have a general idea of what you’ll be facing when they pass.
At a minimum, encourage your parents to prepare estate documents and leave important 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 is different, so this article is only meant to provide some introductory information. Since state laws vary, it’s recommended that you consult with a reputable estate attorney before and during the probate process.
Article written by Laura