Does Debt Pass to the Heirs of An Estate?

Our society runs on debt and most Americans have some form of debt. From mortgage loans to credit cards, people accumulate debt throughout their lives. As a result, most people owe some debt when they die. But if a loved one dies while still owing money, can you inherit debt from them?

Often, when someone suffers a serious accident or chronic illness, they incur medical bills up until the time they pass. They may use credit cards to pay those bills or cover everyday expenses. What if your parent’s estate has extensive debt and not enough assets to pay everything? Can you inherit debt from your parent?

You may also be thinking about how to provide for your family after you are gone. If you have credit card debt or a mortgage, you should be concerned about what assets you can leave for your potential heirs. You may be wondering, does debt pass on when you die?

Debt Inheritance Depends on the Type of Estate Debt

As estate and probate attorneys our clients often ask, can debt be inherited? The short answer to this important question is… it depends. The responsibility for paying estate debt depends on the type of debt left behind. Most debt can be divided into two categories – unsecured and secured.

Unsecured Debt

Typical unsecured debts include credit card balances, personal loans, medical bills, and other financial obligations that are not secured by a tangible asset as collateral for the loan. As a child facing the loss of your parent, do you inherit your parent’s debt? Fortunately, the answer is usually no. Under Michigan law, heirs are not responsible to pay their parent’s unsecured debts UNLESS the heir is a joint account holder or co-signed (guaranteed) the unsecured loan.

Although debt collectors know you are not obligated to pay your parent’s unsecured debts, they may call you and suggest you pay the debt because “it’s the right thing to do.” You should not make any important decisions during the grieving process. Instead, talk to a seasoned estate and probate lawyer to understand your obligations and legal rights as an heir before addressing any estate expenses.

Secured Debt

Debts such as a home mortgage or car loan are usually secured by collateral. A mortgage is attached to the home and the vehicle serves as security for a car loan. If someone dies while still owing a secured debt, the lender has the right to seize the collateral and sell it to satisfy the debt.

Sometimes, the sale proceeds are not enough to pay the entire debt in full. If there is a co-signor, the lender can pursue the joint debt holder for the remaining balance. If there is no co-signor or guarantor, the lender cannot demand payment from the heirs.

Debt Inheritance Exceptions

Although a creditor cannot usually pursue estate heirs for unpaid debts, in some circumstances a creditor can file a claim against the estate assets. Michigan law 700-3803 provides a time frame for creditors to bring a claim against an estate. The probate court determines which debts have priority and must be paid first. Certain valid debts must be paid before others. Burial expenses, estate administration, and medical bills are given the highest priority.

When debts are paid from an estate, fewer assets remain to be divided among the heirs. So even though an heir is not obligated to pay a debt from their own assets, if the estate pays the debt, the heirs will receive a smaller inheritance overall. If the estate doesn’t have enough assets to pay outstanding debts, the heirs may receive nothing.

The estate’s personal representative is responsible for gathering the estate debt and notifying the creditors. In some cases, heirs may be entitled to receive allowances before debts are paid. Because some estate obligations take priority over others, the representative should not start paying debts until the priority is established.

Michigan probate law is complicated. If you are a personal representative or heir, you should consult with an experienced probate lawyer before resolving an estate. The compassionate team at Barron, Rosenberg, Mayoras & Mayoras, P.C. is available to answer all your questions and guide you through the probate process. We are also here to help you plan your estate and possibly avoid probate and the complications that go with it.

So, Can You Inherit Debt From a Loved One? Or Can Your Heirs Inherit Your Debt? We Can Help You Avoid These Concerns

When you work with one of our experienced estate planning attorneys, we can help you create a plan to preserve your assets and reduce your tax and other financial burdens. We can explain when a trust is appropriate and how you can transfer assets directly to your heirs outside of probate to ensure they receive the maximum financial benefit possible. With the right estate planning in place, you can avoid creditor claims that would reduce the value of your estate and maximize the inheritance you pass on to your loved ones.