Debts do not inherit to the children. You are absolutely not liable for your parent's debt, in any way whatsoever. ** Collection agents will lie about this; tricking you is their job, and your job is to tell them Heck no, do I look like an idiot?
When a person dies, all their personal assets (and debts) go to a fictitious entity called the Estate. This is a holder for the person's assets until they can be dispositioned finally.
The estate is managed by a living person, sometimes a company (law firm), called an Executor. Similar to a corporation which is shutting down business, the Executor's job is to act on behalf of the Estate, and in the Estate's best interest (not his own). For instance he can't decide, in his capacity as executor, to give all the estate's money to himself. He has to loyally and selflessly follow state law and any living-trust or wills that may be in place. This role is not for everyone.
You can't just decide "la la la, I'm going to live in their house now", that is squatting. The house is an asset and someone inherited that, as dictated by will, trust or state law. That has to be worked out legally. Once they inherit the house, you have to negotiate with them about living there.
If you want to live there now, negotiate to rent the house from the estate. This is an efficient way to funnel money into the estate for what I discuss later.**
Debts of the Estate
The Estate has assets, and it has debts. Some debts extinguish on the death of the natural person, e.g. student loans, depending on the contract and state law.
Did you know corporations are considered a "person"? (that's what Citizens United was all about.) So are estates - both are fictitious persons. The executor can act like a person in that sense.
If you have unsecured debt, how can a creditor motivate you to pay? They can annoy and harass you. They can burn your credit rating. Or they can sue you and try to take your assets - but suing is also expensive for them. This is not widely understood, but anyone at any time can go to their creditors and say
"Hey creditor, I'm not gonna pay you $10,000. Tough buffaloes. You can sue me, good luck with that. Or, I'll make you a deal. I'll offer you $2000 to settle this debt. What say you?
And you'll get one of two answers. Either "OK" or "Nice try, let's try $7000." If the latter, you start into the cycle of haggling, "3000." "6000." "4000." "5000. "Split the difference, $4500." "OK." This is always a one-time, lump sum, one-shot payoff, never partial payments. Creditors will try to convince you to make partial payments. Don't do it.
Anyone can do that at any time. Why don't living people do this every day?
- The creditor won't loan you any more money if you do
- It will burn your credit rating, so neither will anyone else
- It's immoral
How about an Estate? Estates are fictitious persons, they don't have a "morality", they have a fiduciary duty. Do they plan on borrowing any more money? Nope. Their credit rating is already 0. They owe no loyalty to USBank. Actually, the executor's fiduciary duty is to get the most possible money for the assets, and settle the debts for the least.
So I argue it's unethical to fail to haggle down this debt. If an executor is "not a haggler" or has a moral issue with shortchanging creditors, he is shortchanging the heirs, and he can be sued for that personally - because he has a fiduciary duty to the heirs, not Chase Bank. Like I say, the job is not for everyone.
The estate should also make sure to check the paperwork for any other way to escape the debt: does it extinguish on death? Is the debt time-barred? Can they really prove it's valid? Etc. It's not personal, it's business.
The estate should not make monthly payments (no credit rating to protect) and should not pay one dime to a creditor except for a one-shot final settlement.
Is it secured debt? Let them take the asset. (unless an heir really wants it).
Estate must still be settled
When a person dies with a lot of unsecured debt, it's often the case that they don't have a lot of cash lying around. The estate must sell off assets to raise the cash to settle with the creditors. Now here's where things get ugly with the house.
** The estate should try to raise money any other way, but it may have to sell the house to pay the creditors. For the people who would otherwise inherit the house, it may be in their best interest to pay off that debt.
Check with lawyers in your area, but it may also be possible for the estate to take a mortgage on the house, use the mortgage cash to pay off the estate's debts (still haggle!), and then bequeath the house-and-mortgage to the heirs. The mortgage lender would have to be on-board with all of this. Then, the heirs would owe the mortgage.
Good chance it would be a small mortgage on a big equity, e.g. a $20,000 mortgage on a $100,000 house. Banks love those.