Dear Penny: Who Pays for Dad’s Massive Debt When He Dies?

Dear M.,

It sounds like the worst-case scenario here is that you and your sister won’t receive an inheritance. But the good news is that you and your sister won’t inherit a mountain of bills.

I’m assuming that you and your sister haven’t co-signed a loan for your father and that you don’t jointly own property together. In these circumstances, you could be on the hook for his debt.

Otherwise, when your father dies, his property and debts will become part of his estate. Then, it becomes up to a probate court to decide how to distribute the assets in keeping with his wishes, while also ensuring creditors get paid. (There are some exceptions where assets avoid probate altogether. For example, if he has money in a retirement account, it will go directly to whoever is listed as the beneficiary, as would any life insurance benefits.)

If your father dies with more debt than assets, his estate would simply be declared insolvent. What that means is that there’s not enough money to cover all of its debts. The probate court would decide which debts get the highest priority.

Funeral and probate expenses are included as debt, and typically these are considered the highest priority by the court. Other claims that get high priority include medical bills, outstanding judgments and — surprise, surprise — money owed to the IRS. Unsecured debt, like a credit card balance, has the lowest priority.

If creditors can’t be fully repaid, you and your sister won’t get any proceeds from the sale of your dad’s home. But they won’t be able to sue you and your sister over the debt. If your dad doesn’t have enough in his estate to pay all his debts, some creditors will simply be out of luck.

All that said, don’t be surprised if debt collectors contact you after your dad’s passing. Debt collectors know that surviving non-spouse family members aren’t responsible for paying a deceased loved one’s debts in most cases. But there are also a lot of unscrupulous debt collectors out there.

Check out the Federal Trade Commission’s post on dealing with a deceased relative’s debt. If you suspect a collector violates the rules, you can file a complaint with the FTC. If you have any questions about whether a debt needs to be paid, it’s essential that you contact an attorney.

Your father may not be great at managing money. Since he has substantial debt, you and your sister should assume that you won’t receive anything from his estate. But no matter how messy his finances are, you shouldn’t lose sleep worrying that you’ll be responsible for his unpaid bills.

Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected] or chat with her in The Penny Hoarder Community.