When you die, your loved ones assume ownership and responsibility for your assets and possessions. Debts you owe are not an asset but a liability. Provided your loved ones never signed a contract agreeing to pay the original creditor, they are not liable for your debts and cannot directly inherit them. Your creditors, however, can still pursue payment from the estate you leave behind.
Inheriting Secured Assets
Any creditor that holds a security interest in an asset can repossess that asset should timely payments stop arriving--even if the owner of the asset dies. An heir that accepts ownership of an asset must also assume the payments lest he lose the asset to the secured creditor. For example, if you inherit and accept a home that carries a mortgage, you must obtain a new mortgage or assume the existing mortgage to prevent foreclosure.
Heirs can avert making payments on inherited items by forfeiting their right to the inheritance. The executor of the will then offer ownership of the asset to the next heir in line to receive it. Heirs are not forced to take on their deceased loved one's financial obligations involuntarily.
Reduced Inheritance
A probate court handles the distribution of the deceased's estate. Unsecured creditors lack the right to seize any of the deceased's assets when payments cease and must file payment requests with the probate court.
Depending on your state of residence, payments to unsecured creditors could take precedence over family allowances--reducing the inheritance heirs receive from the deceased's estate. In this case, heirs aren't directly responsible for payment but pay the debt indirectly through a reduced inheritance.
Joint Debt Liability
When two people share joint liability for a debt, such as a joint credit card account, and one of them dies, full liability for payment falls to the surviving individual--regardless of whether that individual is an heir to the deceased's estate.
Both account holders on a joint debt are legally liable for 100 percent of the debt. Thus, liability for payment is not "passed down." Because joint account holders are often married or closely related, however, the surviving account holder's responsibility for paying the full amount owed may appear to be debt inheritance when, in fact, his liability never changed.
Collection Activity
Although a deceased individual's family members do not inherit her debts upon her death, creditors may still sell these debts to collection agencies that demand payment from the deceased's loved ones. Informing a consumer that he is legally liable for someone else's debts is prohibited under the Fair Debt Collection Practices Act (FDCPA)--but that does not stop collection agencies from using the practice to frighten misinformed heirs into making payments.
No matter what a debt collector tells you, it cannot transfer a deceased family member's debt into your name, insert the account on your credit report or sue you for payment. If a collection agency representative threatens to do so, you have the right to sue the company for violating the FDCPA.
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