Many older Americans find themselves in debt because of falling housing prices, and debt incurred with credit cards and student loans that were taken to help their kids through college. Texas families may be curious to know what happens to this kind of debt when the holder of it dies. The answer varies based on the type of debt andestate planning.
Unless a family member was a co-signer, it's unlikely that anyone will be directly responsible for any unpaid debts. However, if there are enough sufficient assets to pay unsecured debt, they debt will be paid. However, if there isn't enough money in the estate, they will simply be uncollectable. Secured debt is a slightly different issue. Mortgages can be paid off with estate assets or the heirs can assume the balance and keep paying it. It's basically the same story with car loans. Student loans insured by the federal government are forgiven at death. Also, IRAs, brokerage accounts, 401K accounts all go directly to the heirs, and aren't used to consider whether or not the estate has enough money to pay for its debts.
It is important to note that community property states like Texas treat debt differently. This means that debts and assets acquired during the marriage are considered joint assets. So, in a community property state, it's possible for individual debt to fall back on a surviving spouse.
As parents and grandparents age, it can be difficult for family members to have meaningful conversations about finances. An elder law attorney may be able to help with this situation by sitting down with the aging family members and recommending ways to plan their estates in ways that benefit their heirs.
Source: Daily Finance, "Inheriting Debt: How to Deal When You're Left a Money Mess", Adam J. Wiederman, June 24, 2013