It's natural to panic when a loved one has died and you begin to realize that his medical bills and credit card bills have really piled up. Are you responsible for paying them?
In most cases, the answer is no. Exceptions can exist, such as if you're the surviving spouse and you live in a community property state, or if you cosigned on a particular debt, but for the most part, heirs don't "inherit" debt.
Responsibility for paying off the deceased's bills and in what amounts depends on state law and whether the decedent's estate is solvent.
What Is a Solvent Estate?
The executor or personal representative appointed to manage the estate will pay the decedent's bills as part of the probate process. An estate is said to be solvent if the decedent left sufficient assets and cash to pay off his debts after his death. The total exceeds the amount he owed when the value of everything he owned is added up, including money in his bank accounts.
The executor will use his cash and liquidate assets, if necessary, to pay off all bills and creditors.
The equation includes assets the decedent owned in his sole name and that comprise his probate estate. Assets that don't have to pass through probate to transfer to living beneficiaries are not included, such as retirement accounts with named beneficiaries or real estate that passes directly to a co-owner by operation of law. The executor has no control over these.
A decedent's estate is considered solvent if the value of all the decedent's assets adds up to $500,000 and his debts, including mortgages and car loans, equal $350,000. The personal representative can pay his bills in full, although she might have to sell the car and the real estate to cover those loans.
What's left—in this case, $150,000—goes to the beneficiaries named in the decedent's will, or to heirs-at-law if he did not leave a will. Heirs-at-law are individuals so closely related to him that they inherit by state law in the absence of an estate plan.
What Is an Insolvent Estate?
An insolvent estate is one that doesn't have enough assets to pay off all or even some of the decedent's bills. The total is equal to or less than the debts he owed when the value of his probate estate is tallied up.
The personal representative must prioritize payment of the decedent's bills according to state and federal law when an estate is insolvent. These statutes dictate which creditors should be paid in full, which will receive only partial payment, and which will get absolutely nothing.
Creditors typically do not divide up the available cash and assets equally when an estate is worth $500,000 but the decedent left $600,000 in debt. The available $500,000 would not necessarily be divided up among 25 creditors in equal $20,000 increments.
Medical bills take precedence in some states if they were incurred within a certain period of time before the decedent's date of death, usually 60 days. The personal representative would have to pay these and other "priority" debts first, and creditors such as credit card lenders would then proportionately share in any money that's left over.
Unfortunately, the decedent's beneficiaries or heirs-at-law typically receive nothing when an estate is insolvent, but neither are they responsible for paying off the balance of the decedent's unpaid debts. The companies that weren't paid in full usually have to write off their debts.
Nursing Home Bills
Nursing home bills can be tricky in some states. Several jurisdictions allow these institutions to pursue adult children for some portion of their parents' unpaid medical bills if the estate can't cover them.
Check with a local attorney if your parent passed away after a long and expensive stay in a nursing home. Find out your state's position regarding these bills and whether you have any liability.
The situation also changes with debts that weren't taken in the decedent's sole name. If you cosigned with him on a credit card or an auto loan, this debt does not go away with his death even if his estate is insolvent. Nor is his estate responsible for paying it if indeed is solvent.
Consumer law trumps estate law in this case and responsibility falls to you as the co-debtor. The lender has someone else contractually on the hook for the money, and it's totally within its rights to pursue the co-debtor for the entire unpaid balance, just as if the decedent had lived but had defaulted on the loan.
Marital Debts in Community Property States
Debts incurred by either spouse in community property states are generally considered to be equally owed by both of them, even if only one spouse contracted for the debt. They're effectively owed by the marital "community," not by either spouse individually, so the surviving spouse could remain liable for these debts.
"Could" is the pivotal word. These laws can be particularly complex and can vary somewhat between the community property states: California, Texas, Nevada, New Mexico, Arizona, Louisiana, Wisconsin, Idaho, and Washington as of 2019.
If you live in one of these jurisdictions and your spouse has died, speak with an attorney to be absolutely sure you understand your rights and responsibilities. Some of these states do not consider that medical debts are owed by the marital community, but others do.
In most cases, you will be responsible for at least some portion of credit card debts in community property states, whether they're in joint names or in just the name of your spouse.
If the Decedent Received Medicaid
States typically reserve the right to seek repayment of Medicaid benefits even when the decedent leaves an insolvent estate. This has the effect of pushing these debts to the front of the "priority" line for payment in insolvent estates, although the state typically can't pursue relatives for payment or attempt to collect if the decedent left a surviving spouse who is still alive.
Medicaid rules can be extremely complicated, and they can also vary from state to state. You'll want to speak with an attorney to find out where you stand if your parent or loved one was receiving these benefits.