Senior woman in pain, stressed © iStock

Dear Real Estate Adviser,

My mother is in failing health. Her mortgage is worth more than her property. After she dies, can her credit union go after money in her IRA and/or her checking or savings accounts to pay off the difference, especially since she has them with the same institution?

— Cindy C.

Dear Cindy,

I’m so sorry your mother is ailing. It’s challenging to tend to all of these details with this great weight on your shoulders.

Since your mother is underwater on her home, you and her heirs can simply decide not to accept that part of her inheritance, assuming she wills you the home. In that case, the credit union would take the property and sell it to pay off the remaining mortgage balance.

Deficiency judgment is possible

However, the lender may then enter a deficiency judgment against your mother’s estate and likely consume any remaining estate assets. Typically, lenders can’t seize an individual’s savings or checking fund until a court has granted them such a judgment, even if they lie in the same institution. However, federal law prohibits transferring certain assets specifically to avoid such creditors, so be careful.

Short-sale option

A 2nd and somewhat less likely option for disposal of the home is for the executor to work out a short sale with the lender where the property is sold to a 3rd party for whatever it can get, and the lender agrees that those proceeds satisfy the debt.

Some assets can’t be tapped

But as for the IRA, or any account with a beneficiary (including a 401(k), insurance policy, stock-brokerage account or pension plan), these typically can’t be tapped to satisfy the decedent’s debt. But state debt-collecting laws vary somewhat, so it behooves you to research this thoroughly and possibly contact an estate planner or probate attorney for clarification, and perhaps to advise you about the legality of any asset transfers you or your mom may be considering.

Family debts

I should point out that while you and other heirs will inherit your mom’s possessions, you won’t inherit her other debt either, unless one of you agreed to be jointly responsible for all or part of it. Realize, though, that there may be seedy debt collectors who surface and try to shame family members into settling some of your mom’s arrearage; feel free to rebuff them with prejudice.

By the way, family members do have the option to assume the decedent’s home loan at the same interest rate and monthly payment and can then usually refinance it, in the event this option is desirable. But with the state of the loan, I would strongly advise against this effective buy-in to an underwater mortgage.

Hence, when your mother does die, there will be no need to continue making house, tax or insurance payments. The foreclosure or short sale that would follow would not affect heirs’ credit ratings.

Good luck and best wishes to your ailing mother.

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