Must a Child Pay His Dead Parent's Debt

Many parents and children worry about who will be responsible for any remaining debt when the parent passes away. Parents do not want to pass on debt and any financial mistakes they have made to their children. There are specific laws regarding debt and death. Debt cannot be passed down to children, but it may affect the amount of inheritance they receive.

Debts and Death

Debt does not get passed down after someone dies. However, any assets that the deceased owned must stand good for the debt before they can be passed on to the heirs. For example, if your mother had $10,000 in credit card debt and owned a home worth $50,000, then the home would need to be sold and the debt paid before the rest of the money would be divided among any remaining children. If there is more debt than assets, the remaining debt will be forgiven. However, if a child or a friend is a cosigner on a loan or a credit card account, the responsibility of the remaining debt automatically shifts to that person.

Settling Debts and Dividing the Estate

The executor of the estate is responsible for settling the estate. He will need to send a copy of the death certificate to each creditor and explain that he will contact them once the estate is settled. Then he will liquidate any assets, such as cars, houses, bonds or stocks. The money will need to be divided equally among the creditors. Any assets with a lien attached, such as a home or car, will have the proceeds from the sale go directly to pay off that loan. The remaining assets should be divided by the same percentage going toward each debt.

Working With Creditors

The executor should send each creditor a letter with the final payment. The letter should explain that this is the final payment and that the estate is considered settled and the account should be closed. If there was not enough money to pay the debt off in full, the letter should explain that as well. The creditor should then close the account and forgive any remaining debt. Generally, creditors like to see proof that the estate has been completely liquidated and divided among the creditors.

Life Insurance Vs. Inheritance

Life insurance is not considered a part of the estate. If parents are looking for a way to leave someone an inheritance but have a large amount of debt they are working to pay off, life insurance can solve this problem. Parents of young children should have enough life insurance to provide for the care and education of their children. Older parents may choose to have enough to pay for burial costs or additional insurance to give to their children upon the parents' death.