Avoiding Your Parents' Debts

by Gary Foreman

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I have been thinking about my parents' debts and what will happen when they die. They have no life insurance or savings, so I will have the responsibility of burying them. They have utility bills, criminal fines and hospital debts. These are the only types of debts that they have. Will I be made to pay these off once they are deceased? I was also thinking of buying life insurance on them to help with the funeral expenses. Do you think it is more likely that everyone who is owed money will try to take it from the insurance policy than if they died with no insurance or anything at all?

Ellen faces a common problem. Many of us will need to deal with our parent's estate. If we're fortunate, our parents will have accumulated more assets than debts during their lifetime. Maybe even leave us a few dollars.

Sadly, that's not Ellen's situation. In fact, she needs to be careful that she doesn't accidentally "inherit" her parents' debts.

We'll begin with the second part of Ellen's question. She's correct to worry about funeral expenses. According to the National Funeral Directors Association, the average cost of a funeral was $7,045 in 2012, not including the cemetery plot, vault and services.

If her parents have any savings at all, most states will allow some of it to be used for burial expenses even if there's not enough to repay debts. She's wise to consider buying life insurance in an amount sufficient to pay for her parents' funeral and burial. Remember that funeral costs could go up in the future. Buy a policy big enough to cover your needs.

The life insurance policy probably won't put cash into her hands in time for the funeral. Ellen can expect the cemetery to want payment before allowing interment. So she'll still need to have some cash or credit available for a short period.

The insurance should not attract creditors as long as the policy is payable to Ellen. And if she has not assumed responsibility for any of the debts, the insurance proceeds have nothing to do with them.

This leads us to the bigger question. Is Ellen responsible for any of her parents' debts?

First, parents can't just "leave" you debts in their will. It would be a neat way of repaying your kids for their rebellious teen years, but the law doesn't allow it. Debts that your parents owe at the time of their death will either be paid out of their estate, paid by other living people who have previously assumed a responsibility for the debt, or be written off as uncollectable by the creditor.

It is unlikely that Ellen is liable for her parents' legal or hospital debts. If she had been a party to the lawsuit or guaranteed the hospital bill, she would have known it. Same thing is true with utility bills. Unless her name is on the account or she supplied her credit card number, she should not have any responsibility for an unpaid bill.

The next question is how can Ellen make sure that she doesn't become responsible for any other debts that her parents might incur before death. If she's not careful, she could unwittingly assume them. Ellen will want to avoid any joint accounts with her parents. For instance, if she deposits money into a joint checking account, that money can be taken to pay her parents' debts.

Joint credit card accounts pose another danger. If you are named on the account, you will be responsible for all of the debt on that account even if you never used the card. You'll know if you're a joint account holder because you will have had to sign an application or apply online for the account. A call to the credit card company can verify your status.

A joint account is different than being an "authorized user." That's when you are allowed to use the credit card, but are not responsible for the debt. Although the authorized user is not required to make payments on the account, the account will be included in calculating the authorized user's credit score. So if your parents are bad about paying their bills, do not become an authorized user on their account. In fact, even if they have a good credit history, as they get older, it's possible that Ellen's parents will forget a bill and send it in late. That would hurt Ellen's credit score as well as their own.

Finally, remember that creditors can try to collect from anyone. Ellen might get calls from her parents' creditors demanding payment. But, unless she's legally responsible for the debts, there's no reason to send them any money. Just tell them not to call and hang up.

updated: July, 2014

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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