Can Children Inherit Their Parents' Deficiency Judgment Debt?

If a creditor had a deficiency judgment against your parents, it means they defaulted on a loan secured by collateral – typically their home or an automobile. Consumer law allows secured creditors to take back the collateral if creditors don't make their scheduled payments. When creditors reclaim assets, they sell them as promptly as possible in an effort to recoup some of the money due. Quick sales don’t usually bring in top dollar. If the collateral sells for less than the loan balance, the creditor can ask the court for a deficiency judgment, obligating the debtor to pay the difference. In most cases, unless the creditor uses the judgment to place a lien against other property, a deficiency judgment is an unsecured debt – after foreclosure or repossession, an asset no longer exists to secure the loan.

You typically would not be responsible for any of your parents' debts, either during their lifetimes or after their deaths. An exception exists if you co-signed for the loan with them. Under consumer law, this makes you equally responsible for the loan balance – you and your parents are joint obligors. In this case, a deficiency judgment would exist against both you and your parents. Because the judgment isn't their sole debt, you would be obligated to pay it if they could no longer do so.

After their deaths, your parents' estate – not you – is liable for their debts. If one of those debts is a deficiency judgment and you were never on the loan, the executor of your parents' estate will satisfy the debt as part of the probate process. This sometimes involves liquidating estate assets to raise cash. Because deficiency judgments are unsecured debts, they move to the bottom of the food chain for payment as the executor pays these bills. Under the probate code in most states, your parents' taxes, funeral expenses, the costs of operating the estate, and secured debts all receive payment first. If there's any money left over, the executor will pay the deficiency judgment. If not, it's noncollectable. The creditor can't go after anyone else for payment.

Another scenario exists if the deficiency occurs after your parents' death, during the probate process. Assuming they were current on their loan payments, the executor would usually continue making mortgage payments as part of the probate process. If insufficient money exists in the estate to do so, the lender can foreclose or repossess the asset, but this would typically require the approval of the court. The executor can often forestall or avoid repossession or foreclosure by involving the court, at least long enough to allow for sale of the asset or its transfer to you or another beneficiary. Ideally, the executor could avoid a deficiency. If the asset is underwater – your parents owed more for it than its present worth – the deficiency would either be satisfied or go unpaid as part of the probate process. If you've inherited the asset and it's underwater, you might want to talk to a lawyer or other professional. If you become owner of the property, you could become responsible for its associated loan.