Dealing with the loss of a loved one can be challenging, and unfortunately, comes with financial considerations that may compound your distress. Apart from calculating the cost of the funeral, you may be faced with questions about any outstanding debt and who assumes responsibility for it. You might wonder if there’s a chance to sidestep this potentially inherited burden.
In most circumstances, the simple answer is ‘no.’ However, there are certain exceptions:
If you’ve co-signed a loan, the onus is on the co-signer to pay the debt.
Being a joint account holder on a credit card puts the burden of the debt on you.
Certain state laws can mandate a spouse to settle specific types of debt.
In community property states, the surviving spouse may be obligated to use community property to settle the deceased spouse’s debts.
If none of these conditions apply, generally only the deceased person’s estate bears the debt. So, how can you protect yourself from the exceptions? Here are ten methods to avoid inheriting debt:
AVOID CO-SIGNING OR JOINT DEBT
Co-signing debt means you’ll be held accountable for the balance, should the primary borrower cease payments due to death or any other reason. Should co-signing be the only viable solution, make sure to have a backup plan such as an insurance policy to cover the debt in case of the co-signer’s death. An applicable life insurance policy can take care of the debt by seeing it paid in full upon the demise of the borrower.
BE CAUTIOUS WITH SUPPLEMENTARY CREDIT CARDS
Family members often have supplementary credit cards for convenience, but certain firms hold the supplementary cardholder equally liable for clearing the full balance. If you hold a supplementary card and choose not to continue payments after the primary cardholder’s death, you may see a negative impact on your credit score.
INVEST IN A TERM LIFE INSURANCE POLICY
Should you be worried about your loved ones inheriting your debt, consider taking preventive actions now. Many individuals with joint debts or who have co-signed loans decide to get term life insurance to manage these debts. This arrangement prevents the debt from propagating to the co-signer or co-borrower.
PLAN YOUR ESTATE
Estate planning is crucial to ensure a smooth transition of wealth and responsibilities. It is vital to engage in transparent conversations about debts and financial obligations.
CREATE A WILL
Having a will helps articulate your desires about the distribution of your estate, guaranteeing that your beneficiaries get what you intended for them. It is imperative to have your will vetted by a reliable attorney and make multiple copies for safekeeping.
ACTIVELY SETTLE DEBTS
Address any debt you currently have as soon as possible and be aware of the repercussions of not paying it off or the options available for repayment. Consulting a professional might be necessary if the debt seems insurmountable.
ALERT CREDITORS AND CREDIT BUREAUS
The executor of the estate should promptly notify creditors and credit bureaus of the debtor’s death. This involves placing a “Deceased: Do Not Issue Credit” notice on the deceased’s file and obtaining a comprehensive credit report to identify outstanding obligations.
BE INFORMED ABOUT COMMUNITY PROPERTY STATES
In some states, the surviving spouse is obligated to pay off the deceased’s debt, including any obligations not previously disclosed.
To summarize, there are circumstances where you may inherit debt from a loved one. If this is a concern, open a dialogue regarding how any potential debts would be dealt with following their passing. You can also discuss financial safeguards like life insurance to handle any debts you may leave behind.
