No matter how you avoid the pitfalls of the modern financial system, there are circumstances when unexpected distresses such as an unpaid debt of a loved one may become a reason for worry, irrespective of your capacity to bear the responsibility. In this brief read, we look at the finer lines of the laws around debt inheritance, and the right way forward in such a situation.
Debt After Death: Understanding the Results
Typically, the executor is required to manage or find out ways to settle the debt of a deceased person or their testator. Assuming that the deceased had enough assets; it becomes the responsibility of the executor to take the essential steps to:
- Control and manage all liquid assets, cash, and fixed properties
- Pay off all outstanding debts in full, in order of priority. Once the debts are settled completely, the rest of the assets must be passed on to the beneficiaries.
If any debt is left behind, the creditors write it off. This, however, is not the end, as there are situations when the remaining debt passes on to a relative or friend, and we have another case of ‘debt inheritance’.
When Do You Inherit Your Loved One’s Debt?
Your loved one’s debt could pass on to you in either of the following situations.
When you are a Joint Account Holder or a Co-Signer
This situation is usually applicable to unsecured debts such as personal and student loans, and credit cards. Given this, if you are co-signer or a joint account holder on the deceased’s account, their debts will pass on to you, thereby making you responsible for their financial obligations. You will also be required to settle their mortgage and auto loans, if any, but these balances will not show up as outstanding amounts immediately after the person’s death — thanks to federal government’s directive against the acceleration of loan balances.
When You are the Deceased’s Wife or Husband
If you are the deceased’s spouse and live in one of the community property states such as Idaho, Louisiana, Nevada and Arizona, the remaining debt will pass on to you. Community property states are those states where the earnings of the wife or husband during their marriage is considered the property of the state and debts incurred during this period are debts of the couple. In such a situation, better seek legal advice.
How to Avoid Debt Inheritance?
Thankfully, there are ways to prevent and get out from such unexpected distresses.
Life Insurance Investment
Life insurance is a good way to cover the costs of your deceased spouse’s debts and settle other expenses as well. Talk to your beloved to invest in an insurance policy. Ideally, you need to take its advance as early in life as possible, as age and medical conditions are crucial factors that determine the qualification and terms and conditions of life insurance policies.
Though it may sound like an off-beat advice, building good financial or spending habits is a sure shot way to help you settle your loved one’s debt. Disciplined spending habits, proper budget planning and a frugal lifestyle help you save money that you can use later to pay off debts.
How to Avoid Unwarranted Collection Calls?
You should know when you are or can be held accountable for the debts of your dead relative or friend. This is especially important to ensure that collection agencies do not, by any chance, try to exploit you. If you receive unwarranted collections calls, either talk to an attorney or write a letter using a certified email letting the disturbing-agency know that you would like them to stop contacting you.
The Road Forward
Though you may not have control over such unexpected distresses, you sure have complete control over the future. Even if you find yourself at the receiving end of a debt you cannot afford to pay, do not lose hope, or worse, avoid the obligation. Rather, seek consultation from a credit management expert to help prepare a tailored repayment plan that allows you to repay the debt without hurting your routine expenses. To learn more about how credit repair professionals can help you pay off the debt, feel free to connect with us.