You Might Be Liable For Your Parents' Debts

Typically, you are not bound by a contract you didn't sign. However, thirty states have so-called filial responsibility and support statutes that obligate adult children to make good on their parents' debts. New York doesn't have such a statute. Yet creditors from your parents' home states may be able to use these statutes to reach out-of-state children.

The statutes generally require the debt be for necessities, and that the parents be indigent. Government enforcement has been rare. Occasionally, Medicaid programs enforce these laws when there has been a recent divestment of assets for eligibility purposes.  But nursing homes in a few states have been aggressively using this law to collect against children even when the parent has significant Social Security benefits and pension payments, which cannot be garnished. I imagine there are more than a few baby boomers out there struggling to pay their children's college bills who are due for a rude awakening.

Comments

  1. The most disconcerting thing concerning repaying parental debts that I have seen are reverse mortgages. Any thoughts?

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  2. Interesting question. Topically, it seems that support statutes aren't implicated in reverse mortgages, which are non-recourse. If the parent dies or moves out of the house, the bank has to make do with the proceeds from the sale of the house. The estate usually has the option of selling the house. Perhaps if the heirs want to keep the house, they have to pay off the outstanding loan amount. What context have you seen this issue pop up, Aleza?

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  3. I'm going to qualify this by stating that I don't appraise real estate or deal with mortgages, and that I originally asked this question in order to increase my understanding of this topic - but, in some cases, it is my understanding that since in a reverse mortgage one is using up the equity which one has previously paid into the property, if the property value drops, the amount borrowed from the reverse mortgage can be higher than the value of the property, even before accounting for miscellaneous fees and taxes. According to the US Department of Housing, http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm: "Will I still have an estate that I can leave to my heirs?"

    "When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs."

    Despite the fact that the website also says "you can never owe more than the value of your home at the time you or your heirs sell the home," if one does not have to pay back the loan amount while living in the house, if one maxes out the loan before the dip in property values, potentially, why couldn't this cause the estate and one's heirs to owe more than it/they can pay back? Especially once the "interest and other fees" are included?

    ReplyDelete
  4. I’m going to qualify this by stating that I don’t appraise real estate or deal with mortgages, and that I originally asked this question in order to increase my understanding of this topic – but, in some cases, it is my understanding that since in a reverse mortgage one is using up the equity which one has previously paid into the property, if the property value drops, the amount borrowed from the reverse mortgage can be higher than the value of the property, even before accounting for miscellaneous fees and taxes. According to the US Department of Housing, http://www.hud.gov/offices/hsg/sfh/hecm/rmtopte... “Will I still have an estate that I can leave to my heirs?”

    “When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender. The remaining equity in your home, if any, belongs to you or to your heirs.”

    Despite the fact that the website also says “you can never owe more than the value of your home at the time you or your heirs sell the home,” if one does not have to pay back the loan amount while living in the house, if one maxes out the loan before the dip in property values, potentially, why couldn’t this cause the estate and one’s heirs to owe more than it/they can pay back? Especially once the “interest and other fees” are included?

    ReplyDelete
  5. Aleza,

    I didn't explain that too well.

    Reverse mortgages are non-recourse loans. If the borrower defaults, the only remedy the lender has is to foreclose upon the property. The lender cannot sue the borrower for any deficiencies. Most mortgages are recourse mortgages, and lenders can sue borrowers for the difference between the foreclosed property and the amount in arrears.

    The exception is California, where all loans are non-recourse. This is legislatively-mandated earthquake insurance. If an earthquake smacks down your house, you don't have to go upside-down on your mortgage. You can just walk away.

    William

    ReplyDelete
  6. Thanks for the excellent and informative reply Will!

    ReplyDelete

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