When a parent passes away and leaves behind an estate that contains assets and debts, you may need clarification about what you are responsible for. As the beneficiary, do you have to pay off your parent’s credit cards and mortgage?
It depends.
Two kinds of debt
There are generally two types of debt: secured and unsecured. Secured debt involves collateral, such as a mortgage, where the house or property is collateral, or a car loan, where the car is collateral. Unsecured debt is that debt that has no collateral, such as a personal loan, credit card balances, and medical bills.
Unsecured debt
Just because a credit card has an unsecured balance, it does not mean that the credit card company won’t try to collect money from the estate’s heirs. Unless you are a co-signer or guarantor of the card or loan, this is not possible, but creditors can, however, go after the assets of the estate to pay off the debt.
Secured debt
If your loved one has a mortgage or other secured debt, you are responsible for satisfying that debt from the estate’s proceeds as a beneficiary. If you choose to keep the house or the car, you will be responsible for paying off the balance of the secured debt, or the creditor can foreclose to take back ownership of the property.
Fiduciary duty
When someone dies, the executor or administrator of their estate has a fiduciary duty to settle their affairs, including validating and paying outstanding debts that are exclusively held by the estate. Debts that have a co-signer or co-borrower are the responsibility of the person who shared or guaranteed the debt.
According to New York code, creditors have up to seven months to file claims from the appointment of letters against an estate. It is advised that only after the seven months have expired and the deadline for filing claims is past should the fiduciary move forward with the distribution of the remaining assets.
What should be paid first?
If the estate is not large enough to satisfy all the debt, the general order of repayment is as follows:
- Funeral expenses
- Federal debts
- State debts
- Property taxes
- Judgments issued by a court before death
- Other debt
After the death of a parent, you must ensure that you are clear on your responsibilities as a beneficiary to ensure the smooth settlement of your family’s estate. Understanding this information beforehand can save time and stress so you can focus on all other necessary arrangements.
