“Am I obligated to pay the debts of my spouse, child or other family member?” I see or hear someone ask this question often. Baby boomers confront this more and more with elderly parents who may die owing medical bills or money on credit cards or car loans. Parents may wonder if a child’s debt can become their own. I have investigated and have some thoughts on these issues. In many cases, the answer to the question depends on the nature of the obligation or debt.
Creditors and Judgment Owners Can and Will Pursue Marital Assets
For example, one spouse may be sued for an unpaid business debt or for professional negligence such as medical or legal malpractice). More likely, one spouse could negligently operate a motor vehicle, causing personal injury to a third-party. The available insurance coverage may be inadequate to cover the loss. The negligent act could be uninsured altogether. Insurance companies are always looking for contractual excuses not to cover them claims.
In any of these situations, the complaining party a/k/a the “judgment creditor” may obtain a judgment against one spouse – the “judgment debtor-spouse” and seek to collect that judgment from any and all assets in which the debtor spouse has an interest.
If your marriage is like mine, your assets (house, vehicles, bank accounts, and investments) are jointly owned. If they are not, you should re-consider
The Form of Joint Ownership is Important
Most married couples are familiar with the concepts of a “tenancy in common” and “joint tenancy with right of survivorship.” These phrases are often used on vehicle titles or real estate deeds. How these forms of ownership are treated in a marriage is determined by state law, which can vary from state to state. But some generalizations can be made.
A tenancy in common and a joint tenancy with right of survivorship are not unique to married couples. They are used to provide for a smooth transition of ownership should one joint owner die. In these forms of ownership, the ownership interest of each joint owner is legally separated from the other. If two persons (married or not) are tenants in common on a deed or title, a judgment against one of the owners may be enforceable against that owner’s interest in the joint property. This could result in a forced sale or division of the marital property by the judgment creditor.
The same thing can happen to a jointly owned vehicle or bank account. The person owning a judgment against one spouse can pursue all assets in which that spouse has a separate interest, dividing them up and leaving the other spouse with depleted assets. Your objective is to reduce that risk and help your spouse as well as yourself.
Tenancy by the Entirety Can Protect Your Spouse
Most states recognize a special form of joint ownership of property by married couples. This is called a “tenancy by the entirety.” This form of ownership is unique because for as long as the marriage exists, neither spouse is considered to have a separate ownership interest in the property. Instead, it is an indivisible marital ownership.
Most states also recognize that debts incurred by one spouse cannot be enforced against marital assets that are held as tenants by the entirety. It is possible for a judgment against one spouse to attach to jointly held property as a lien. However, if the spouses own the property as tenants by the entirety, most state laws say that the judgment owner cannot enforce the lien unless and until the non-debtor spouse dies. If the debtor-spouse dies first, the lien disappears and the property remains in the hands of the surviving spouse, free and clear.
What Spouses Should Do to Protect Assets
Our state recognizes tenancy by the entirety. We have assets that would be attractive to someone who would successfully sue me or my wife. I am careful to establish that our assets are owned as tenants by the entirety. This does not happen automatically just by being married. It requires proper wording on deeds, titles, bank account documents, and the like. In some cases, I had to create the wording myself and give instructions to a bank employee to use it on our paperwork. In other cases (e.g., real estate purchases), I made it clear to the attorney drafting the deed that we wanted “tenancy by the entirety” specified. In some states, a tenancy by the entirety is recognized for real property but not for personal property. Check the laws in your state.
If your state recognizes this special form of ownership, you should review the paperwork on all of your significant assets and make the changes necessary to create the tenancy by the entirety. If it involves real estate ownership, you will want to involve an attorney.
Debts and Obligations of Living Family Members
If a child or other relative incurs a debt and a debt collector demands payment from you, don’t assume that you owe them anything. If the debt is related to a specific purchase such as a car or furniture, the creditor may have the right to re-possess it. If you do not own or use the asset in question and have not guaranteed the debt, you owe nothing. However, if you say something wrong to a bill collector that changes that, you may end up putting yourself on the hook.
For example, if you promise to pay the debt in exchange for an agreement to extend the payments, you may have just created a re-payment obligation that did not exist before. So when a bill collector calls about a debt owned by a family member, don’t say anything except that you are not that family member and do not owe them anything.
Debts and Obligations of Deceased Family Members
The same rules apply to debts incurred by a family member who has passed away. A creditor may have the right to sue the estate of the relative to collect the debt from the deceased’s assets, but you have no obligation to pay it. However, if you are a joint owner of property also belonging to the deceases family member, a creditor may be able to go after the deceased’s separate interest in the property. Again, that is why a tenancy by entirety for spouses is so valuable.
Final Thoughts on Paying the Debts of Family Members
If you are called upon to pay some or all of the money obligations of a relative, I think you should start with the idea that you owe nothing. That is what you should politely say to the person trying to collect. Only if there is a guarantee or jointly owned property involved will you have to further investigate.
Image credit: Wally Gobetz