Inherited debt? What if your parents die broke?

When you hear the word ‘inheritance’, what is your first thought? Is it positive or negative? Do you think about what you could receive from your parents, or what you might pass on to your children? Answers will vary, but generally the term ‘inheritance’ carries positive connotations. The Oxford Dictionary defines an ‘inheritance’ as ‘a thing that is inherited’. More helpfully, Wikipedia defines it as ‘the practice of passing on property, titles, debts, rights, and obligations upon the death of an individual’.

For this article, however, we’re focussing on ‘debts’ rather than actual things. What happens when your parents die broke? Can you inherit a debt?

The short answer is ‘no’. In most situations it is not possible to inherit debt but there are some exceptions. When a loved one dies, their will should name the executors who are responsible for carrying out the will-maker’s instructions. Part of an executor’s role is to identify the deceased’s assets and liabilities, to pay outstanding debts from the estate and to deal with what remains.

If there is no will, the person has died intestate and there are specific laws to address this situation.

Executors deal with debt of an estate

Media stories often focus on the disposal of large inheritances. In the 21st century it may be more realistic to consider how our increasing trend towards societal debt (credit cards, mortgages, student loans and finance agreements) might impact on the administration of an estate.

If an estate has debts, the executors must clear those debts before distributing the balance of the estate. If it’s necessary, assets must be sold to meet those debts. If there are more debts than assets the debt usually dies with the deceased, unless the debt is:

  • Held jointly, in which case the surviving owner/s must pay the debt, or
  • Secured by a third party, for instance a guarantee, making the guarantor liable.
  • While the legal position on inherited debt is clear, debt collectors may still try to seek what is owed to them. Don’t fall for this. If you are unsure about your liability, speak with the estate’s lawyer.

It’s worth noting that if the deceased had a credit card, you should not use it after their death or you risk personal liability and criminal liability for fraud.

Be organised yourself

If you cannot leave your children an inheritance, you should avoid leaving them an administrative headache or debt by:

  • Having a will
  • Making sure someone knows the location of that will
  • Listing your major assets, investments, bank accounts and insurance policies, and
  • Keeping notes about your main liabilities, not having these secured by third parties unless you really must, and ensuring any personal guarantees by others are revoked as soon as they are no longer required.

As society’s penchant for personal debt rises and we all live longer, it’s becoming less likely that children will inherit large sums from their parents. While that may destroy your dreams of global travel or designer goods, you can at least feel assured that the prospects of inheriting your parents’ debt is low – if you distance yourself from their debts during your lifetime. 

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