73% of Americans die with debt, so it’s understandable to be concerned about the possibility of inheriting some of it. But is that something you should really be worried about?

Whether debt is inherited depends on the type of debt and your state’s law. In most cases, you won’t be on the hook for your loved ones' debts.

But in some cases, you may be.

Here's a quick runthrough of when you do and don’t inherit debt from parents and what happens to their debts after death.

What happens to debt when someone dies?

When someone dies, their belongings, real estate, and financial resources become part of their “estate.” Generally, creditors will first go after an estate to settle outstanding debt.

For example, let’s say your parent had $150,000 debt when they died and a paid-off house worth $200,000. The estate executor could sell the house to cover the debt, leaving a $50,000 inheritance to the heirs.

The process of paying off debt after death and distributing remaining assets to heirs is called probate. Each state has its own laws governing how long creditors have to make a claim against an estate.

Certain assets, such as life insurance policies, 401 (k)s, and individual retirement accounts, cannot be used to settle outstanding debts.

What if someone dies with debt and no assets?

If your parents have accumulated more debts than their assets are worth, their estate is considered insolvent. This means creditors and inheritors may only receive a fraction of the amount owed.

Should their assets not cover their debts, their estate may be declared bankrupt, and the outstanding debts will be written off. While you won't be liable for their debts, you won't inherit anything.

Why you should check for an insurance policy

Many people hold life insurance plans to cover end-of-life expenses and remaining financial obligations, such as mortgages or loans, in the event of death.

These plans pay out to specific named beneficiaries rather than to their estate. If you are a beneficiary, you may be able to use this payout to settle debts without needing to sell assets or continue making payments.

How common debts are handled after death

The following information should be treated as a general overview because the specific laws and regulations surrounding debt after death vary from state to state.

Mortgage debt

If your parent was the sole owner of their home, you are not legally obligated to pay the remaining debt unless you inherit it and wish to keep the property.

However, you are obligated to pay the outstanding mortgage if you were a co-signer. Similarly, if you inherit a timeshare, annual maintenance fees are transferred to you.

Medical debt

Like any other loan, if you co-signed a contract for a nursing facility or medical bill for your parent, you'll be responsible for paying what is owed.

Many states also have filial responsibility laws. This refers to laws that require adult children to be financially responsible for their parents if they don't have the means to look after themselves.

The extent of such responsibility varies from state to state. Although rare, long-term care facilities and nursing homes may use them to seek reimbursement for outstanding bills from adult children.

This usually only happens if a parent without Medicaid resides in a nursing home or care facility and has outstanding bills at the time of their passing.

If your parent had Medicaid for long-term care, filial laws don't apply because the government covers their nursing home expenses. But if they are 55 or older, the Medicaid Estate Recovery Program (MERP) comes into play.

The state may seek reimbursement from your parent's estate for long-term care expenses, including nursing home care, home and community-based services, and prescription drugs through this program.

Credit card debt and personal loans

Credit card debt and personal loans are often resolved through inheritance. If the estate does not have enough funds to cover the debt, creditors will likely forgive the remaining amount.

In the case of being a co-signer for these loans, the responsibility of paying them off falls on you. Using your inheritance to fulfill this obligation is possible, so long as all beneficiaries agree.

Student loans

If your parent had federal student loans, the Department of Education will forgive any remaining debt, so long as you provide proof of death.

But, in the case of private student loans, their estate will likely be held accountable for settling the outstanding balance. This can differ, though, based on the lender and the loan terms.

The process of settling your parents’ estate

Your parents' will designates a representative to carry out their final wishes. And if they don't have one, the probate court will appoint an administrator.

This could be you, a family member, or someone willing to take on the role, such as a close friend. In this scenario, it's wise to consult a probate attorney to guide you.

Legal counsel will also prevent you from becoming a victim of bereavement debt collectionsit's not uncommon for people to pay scammers, thinking they're rightfully settling their parents' debts.

Nevertheless, once the value of your parents' estate is determined, the executor will use their assets to pay off the debt in this order:

  1. Funeral expenses
  2. Taxes (federal and state income taxes)
  3. Administrative costs (attorney and court fees)
  4. Secured debts (mortgages and car loans)
  5. Unsecured debts (credit cards and personal loans)

Death doesn’t always mean you inherit debt

To clarify, the estate must pay debts solely in your parents’ names. As per the Consumer Financial Protection Bureau (CFPB), you are only responsible for these debts if you have co-signed a loan.

And remember, hiring a probate lawyer to help you identify your parents' debts and handle creditors claims against your parents’ estate will provide you extra piece of mind.