The website Debt.org has published statistics regarding financial hardships and the increasing number of bankruptcies being filed in America. The statistics show that between 1994 and 2007, the percentage of people over the age of 55 who filed for bankruptcy has double. If you have parents who are getting older and who may be facing some financial hardship, you might have some concerns as to whether you may be forced to bear some of the burden of their financial hardship at some point.
Are you liable for the debts of your parents in Texas?
Generally speaking, you won’t be personally held liable for any debts your parents incur. As a practical matter, if your parents have large debts that the creditor deems worthy of attempting to collect, you may receive some harassing phone calls and letters. If this happens, you should contact an attorney to find out how to put an end to these communications.
While you won’t generally be held liable for the debt of your parents, you may be indirectly affected by the amount of their estates you receive after they pass. If your parents die owing money to creditors, those creditors will likely seek to recover the debts owed during the estate administration process, and if the estate has any assets, the debts will generally be paid before any distributions are made to any beneficiaries.
When you could be held responsible for your parents’ debt
There are a few situations where you might be held liable for debt your parents have incurred. One situation is if you have co-signed on any loans taken out by your parents, or if you have agreed to guarantee any loans. Before you co-sign any loans for your parents, you should read the loan agreement carefully to understand what your obligations and rights are under the agreement. Some loan agreements provide that the lender can go after the co-signer directly without having to first seek payment from the borrower if payments are not timely made.
Another situation where you may be held liable for the debts of your parents is if you serve as the executor of the estate and fail to administer the estate properly under Texas law. The executor of a Texas estate is a fiduciary role with certain responsibilities and obligations. For instance, if you in your role as executor fail to notify creditors of the estate as required under the Texas Estates Code or if you fail to pay any debts that are required to be paid, you could be held personally liable for the debts that are not paid.
Some steps you can take now
There are a few things you can do to protect your parents’ assets from the claims of creditors. Retirement plans (401(k), IRA, etc.) are exempt from the claims of most creditors. So, if your parents name you or another individual as the beneficiary of these plans, the plan assets will not be subject to the claims of their creditors after they die. Additionally, life insurance proceeds are exempt under Texas law. However, an important caveat is that if your parents’ estate is named as the beneficiary of any retirement plans or life insurance policies, then those assets will be available to satisfy the claims of their creditors after they die. This is one reason why it is critical to make sure that beneficiary designations are always up to date and are coordinated with the overall estate plan. For more information see our earlier post regarding the importance of updating beneficiary designations.