Friday, October 3, 2014

How to Deal With Debt Inheritance

The financial state of a significant number of elderly people is not very good. Statistics show that a lot more people aged 65 or older are filing for bankruptcy. The increase in bankruptcy filing by people aged between 65 and 74 increased 178 percent between 1991 and 2007. For those aged more than 74 the instances of bankruptcy during the same time frame increased a mind boggling 567 percent. This trend indicates that a lot more people are going to die leaving debt behind. To add to the debt left behind by the elderly, most of the people who die with unpaid debt also do not have any savings in their accounts. This means that the responsibility of the debt then transfers to the estate left behind by the deceased. If the liquidation of the estate cannot pay off the debt owed by the deceased, then what happens?

Do the Heirs have to pay off the Debt?

Generally speaking, if the estate left by a dying person cannot cover all his debt than it will be forgiven and would not transfer to the person’s heirs but certain things need to be considered, like the state in which the person died and the type of loan left by the dying person. If a debt is cosigned by an heir, he/she will definitely have to pay for it. Similar is the case of a credit card debt if it is on a joint account. This is the reason if you have joint account with your spouse you must be aware of their financial situation. Because if they used the credit card for a shopping spree, or used it to pay off their other debt, without repaying the credit, you will be responsible for paying it off.

The person who co-signs a loan shares the liability of the loan in case the person who owed the debt could not pay it off. This is why it is very important to beware of the consequences before agreeing to co-sign a loan for anyone.

Have a Family Discussion

The best way of avoiding a shock after the death of a dear member of the family is to have a family discussion about financial conditions. If a person is having financial problems, he must share it with the family so that they are not in the unknown when any such issue arises. Moreover, children and spouses should ask their parents as well as spouses about their financial condition if their health is not in good condition. Never delay these things because it is far easier to deal with debt issues if you know beforehand because then you would have a plan to deal with the issue. Open discussion would also benefit because if children want to ensure the safety of the estate or the home of a parent they have time to plan for it.

Different Kinds of Debts

In case someone in your family dies leaving debts behind, you must know that different kinds of debt are treated differently as far as debt inheritance is considered.

  • Mortgage: A mortgage is a secured loan associated with collateral, in most cases a property which can be used to pay off the loan in case the debtor dies or is no longer capable of paying off the loan. This type of loan does not get forgiven by the creditor because in case the estate left by the deceased does not have money to pay off the loan, the lender will simply sell the collateral to get his due amount. However, heirs can get ownership of the property, but in that case they would also have to take ownership of the mortgage, or get it refinanced.
  • Car Loan: This kind of loan is very similar to a mortgage, because the car on which the debt is taken secures the loan. Either the estate cash or selling off the car can pay off the amount owed to the creditor. Moreover, just similar to the mortgage, heirs can take ownership of the car as well as that of the loan or can get it refinanced on their name. 
  • Personal Loans: Personal loans are not secure, that is mostly there is no collateral against which the loan is taken. Yet, this kind of debt also has to be paid off by using the cash or assets left by the deceased person. In case, the estate does not have enough to pay off all the personal loans owed to a deceased person, the executor pays each creditor a share of their owed amount.
  • Student Loan: In case the student loan upon the dead person is insured by the federal government, it would not have to be paid from the estate left by the person. In such cases, the loan gets written off. However, in case the student loan is not insured by the federal government, it becomes the responsibility of the estate left by the dead person.
  • Credit Card Loan: Credit card loan is dealt in the same way as personal loans. Thus, if there are assets left by the person, the loan has to be repaid from it otherwise it would be forgiven. However, if the credit card loan is on a joint account of the deceased with another person, the loan has to be paid off by that person.

Know Your Rights

Whatever happens, the debt of a family member should not become your responsibility if the estate left by the person cannot repay it completely. You should also get knowledge of your state’s laws about debt inheritance if such a situation happens with you. This is because most creditors pressure the heirs and ask them to pay off the debt left by their parents or their spouse. If such a situation occurs you should never feel under pressure or get bullied by the creditors. Surviving family members do not have to pay off the debt if they have not co-signed a loan or do not share an account with the deceased on which there is credit card loan. Moreover, you should consult and designate a single family member for all creditors to communicate with so that they do not intimidate other family members with threats or any other means.

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