Inheriting debt from your parents is a sensitive and often misunderstood topic. Many people worry they will be held responsible for their parents’ debt after they pass away, but the answer is not always clear-cut. There are several factors to consider if you find yourself in this type of situation
Different types of debt
Firstly, it is essential to understand the difference between secured and unsecured debts. Secured debts are tied to a specific asset, such as a mortgage or car loan, while unsecured debts, such as credit card debt, are not tied to any specific asset.
Secured debt
If your parents have secured debts, the lender can seize the asset to pay off the debt. In this case you will not be responsible for any remaining balance. Also, if you inherit a home that has not been paid off, you may end up being responsible for making mortgage payments.
Unsecured debt
On the other hand, you will not inherit your parents’ unsecured debt such as credit card debt or personal loans unless you cosigned for the loan. However, your parents’ creditors will likely go after the estate to collect any outstanding debts. If your parents have assets when they pass away, those assets will be used to pay off their debts before anything is distributed to their heirs.
Non-dischargeable debts
You should understand not all debts are dischargeable upon death. Federal student loans, for example, are not discharged upon death, so if your parents have outstanding student loans, their estate will be responsible for paying them off. The same goes for tax debt, which can be particularly complicated.
Protecting yourself and your parents
If you are concerned about inheriting debt from your parents, there are steps you can take to protect yourself. First, make sure your parents have a will in place. In some cases a trust may be a better option. Whichever estate planning strategy they choose, having a comprehensive estate plan in place will ensure their assets are distributed according to their wishes and can help prevent creditors from going after their estate.
Additionally, if your parents are struggling with debt, encourage them to speak with a financial advisor or credit counselor. They may be able to work out a repayment plan or negotiate with creditors to reduce the amount owed. Additionally, a financial advisor can help your parents maintain a better budget to get their finances back on track.
Managing your inheritance
When you eventually do receive the assets from your parent’s estate, you will have to make some decisions as to how to manage your inheritance. You definitely do not want to mismanage your inheritance that may have been meant to provide you with financial security. A professional financial advisor may be able to help you in putting together a plan for how to budget the money inherited and invest the capital you receive.