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Can I Inherit Debt?
When someone passes away leaving debts behind, you might be wondering if you have any personal liability to pay them. If you have aging parents, for instance, you may be worried about having to assume responsibility for their mortgage payments, credit cards or other debts. If youâve asked yourself, âCan I inherit debt?â the answer is typically no, even though those debts donât automatically disappear. But there are situations in which you may have to deal with a loved oneâs creditors after theyâre gone.
How Debts Are Handled When Someone Passes Away
Debts, just like assets, are considered part of a personâs estate. When that person passes away, their estate is responsible for paying any and all remaining debts. The money to pay those debts comes from the asset side of the estate.
In terms of who is responsible for making sure the estateâs debts are paid, this is typically done by an executor. An executor performs a number of duties to wrap up a personâs estate after death, including:
- Getting a copy of the deceased personâs will if they had one and filing it with the probate court
- Notifying creditors and other entities of the personâs death (for example, the Social Security Administration would need to be notified so any Social Security benefits could be stopped)
- Completing an inventory of the deceased personâs assets and their value
- Liquidating those assets as needed to pay off any debts owed by the estate
- Distributing the remaining assets to the people or organizations named in the deceased personâs will if they had one or according to inheritance laws if they did not
In terms of debt repayment, executors are required to give notice to creditors who may have a claim against the estate. Creditors are then giving a certain window of time, according to state laws, in which to make a financial claim against the estateâs assets for repayment of debts.
If a creditor doesnât follow state guidelines for making a claim, then those debts wonât be paid from the estateâs assets. But if creditors are less than reputable, they may try to come after the deceased personâs spouse, children or other family members to collect whatâs owed.
Not all assets in an estate may be used to repay debts owed by a deceased person. Any assets that already have a named beneficiary, such as a life insurance policy, a 401(k), individual retirement account, payable on death accounts or annuity, would be transferred to that beneficiary automatically.
Can I Inherit Debt From My Parents?
This is an important question to ask if your parents are carrying high amounts of debt and youâre worried about having to pay those bills when they pass away. Again, the short answer is usually no. You generally donât inherit debts belonging to someone else the way you might inherit property or other assets from them. So even if a debt collector attempts to request payment from you, thereâd be no legal obligation to pay.
The catch is that any debts left outstanding would be deducted from the estateâs assets. If your parents were substantially in debt when they passed away, repaying them from the estate may leave little or no assets for you to inherit.
But you should know that you can inherit debt that you were already legally responsible for while your parents were alive. For instance, if you cosigned a loan with them or opened a joint credit card account or line of credit, those debts are legally yours just as much as they are your parents. So, once they pass away, youâd be solely responsible for repaying them.
And itâs also important to understand what responsibility you may have for covering long-term care costs incurred by your parents while they were alive. Many states have filial responsibility laws that require children to cover nursing home bills, though they arenât always enforced. Talking to your parents about long-term care planning can help you avoid situations where you may end up with an unexpected debt to pay.
Can I Inherit Debt From My Children?
The same rules that apply to inheriting debt from parents typically apply to inheriting debts from children. Any debts remaining would be paid using assets from their state.
Otherwise, unless you cosigned for the debt, then you wouldnât be obligated to pay. On the other hand, if you cosigned private student loans, a car loan or a mortgage for your adult child who then passed away, as cosigner youâd technically have a legal responsibility to pay them. Federal student loans are an exception.
If your parents took out a PLUS loan to pay for your higher education costs and something happens to you, the Department of Education can discharge that debt due to death. And vice versa, if your parents pass away then any PLUS loans they took out on your behalf could also be discharged.
Can I Inherit Debts From My Spouse?
When marriage and money mix, the lines on inherited debt can get a little blurred. The same basic rule that applies to other situations applies here: if you cosigned or took out a joint loan or line of credit together, then youâre both equally responsible for the debt. If one of you passes away, the surviving spouse would still have to pay.
But what about debts that are in one spouseâs name only? Thatâs where itâs important to understand how living in a community property state can affect your liability for marital debts. If you live in a community property state, debts incurred after the marriage by one spouse can be treated as a shared financial obligation. So if your spouse opened up a credit card or took out a business loan, then passed away you could still be responsible for paying it. On the other hand, debts incurred by either party before the marriage wouldnât be considered community debt.
Consider Getting Help If You Need It
If a parent, spouse, sibling or other family member passes away, it can be helpful to talk to an attorney if youâre being pressured by debt collectors to pay. An attorney who understands debt collection laws and estate planning can help you determine what your responsibilities are for repaying debts and how to handle creditors.
The Bottom Line
Whether or not youâll inherit debt from your parents, child, spouse or anyone else largely hinges on whether you cosigned for that debt or live in a community property state in the case of married couples. If youâre concerned about inheriting debts, consider talking to your parents, children or spouse about how those financial obligations would be handled if they were to pass away. Likewise, you can also discuss what financial safety nets you have in place to clear any debts you may leave behind, such as life insurance.
Tips for Estate Planning
- Consider talking to a financial advisor about how to manage and pay off debts you owe or any debts you might inherit from someone else. If you donât have a financial advisor yet, finding one doesnât have to be difficult. SmartAssetâs financial advisor matching tool can help you connect with an advisor in your local area. It takes just a few minutes to get your personalized advisor recommendations online. If youâre ready, get started now.
- The Fair Debt Collection Practices Act caps the statute of limitations for unpaid debt collections at a maximum of six years, although most states specify a much shorter time frame. However, some debt collectors buy so-called zombie debts for pennies on the dollar and then â unscrupulously â try to collect on them. Hereâs how to deal with such operators.
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Different Types of Debt
Debt comes in all shapes and sizes. You can owe money to utility companies, banks, credit card providers, and the government. Thereâs student loan debt, credit card debt, mortgage debt, and much more. But what are the official categories of debt and how do the payoff strategies for these debts differ?
Categories of Debt
Debt is generally categorized into two simple forms: Secured and Unsecured. The former is secured against an asset, such as a car or loan, and means the lender can seize the asset if you fail to meet your obligations. Unsecured is not secured against anything, reducing the creditorâs control and limiting their options if the repayment terms are not met.
A secured debt provides the lender with some assurances and collateral, which means they are often prepared to provide better interest rates and terms. This is one of the reasons youâre charged astronomical rates for credit cards and short-term loans but are generally offered very favorable rates for home loans and car loans.
If the debtor fails to make payments on an unsecured debt, such as a credit card, then the debtor may file a judgment with the courts or sell it to a collection agency. In the first instance, itâs a lot of hassle without any guarantee. In the second, theyâre selling the debts for cents on the dollar and losing a lot of money. In either case, itâs not ideal, and to offset this they charge much higher interest rates and these rates climb for debtors with a poorer track record.
There is also something known as revolving debt, which can be both unsecured and secured. Revolving debt is anything that offers a continuous cycle of credit and repayment, such as a credit card or a home equity line of credit.Â
Mortgages and federal student loans may also be grouped into separate debts. In the case of mortgages, these are substantial secured loans that use the purchase as collateral. As for federal student loans, they are provided by the government to fund education. They are unsecured and there are many forgiveness programs and options to clear them before the repayment date.
What is a Collection Account?
As discussed above, if payments are missed for several months then the account may be sold to a debt collection agency. This agency will then assume control of the debt, contacting the debtor to try and settle for as much as they can. At this point, the debt can often be settled for a fraction of the amount, as the collection agency likely bought it very cheaply and will make a profit even if it is sold for 30% of its original balance.
Debt collectors are persistent as thatâs their job. They will do everything in their power to collect, whether that means contacting you at work or contacting your family. There are cases when they are not allowed to do this, but in the first instance, they can, especially if theyâre using these methods to track you down and they donât discuss your debts with anyone else.
No one wants the debt collectors after them, but generally, you have more power than they do and unless they sue you, thereâs very little they can do. If this happens to you, we recommend discussing the debts with them and trying to come to an arrangement. Assuming, that is, the debt has not passed the statute of limitations. If it has, then negotiating with them could invalidate that and make you legally responsible for the debt all over again.
Take a look at our guide to the statute of limitations in your state to learn more.
As scary as it can be to have an account in collections, itâs also common. A few years ago, a study found that there are over 70 million accounts in collections, with an average balance of just over $5,000.
Can Bankruptcy Discharge all Debts?
Bankruptcy can help you if you have more debts than you can repay. But itâs not as all-encompassing as many debtors believe.
Chapter 7 bankruptcy will discharge most of your debts, but it wonât touch child support, alimony or tax debt. It also wonât help you with secured debts as the lender will simply repossess or foreclose, taking back their money by cashing in the collateral. Chapter 13 bankruptcy works a little differently and is geared towards repayment as opposed to discharge. You get to keep more of your assets and in exchange you agree to a payment plan that repays your creditors over 3 to 5 years.
However, as with Chapter 7, you canât clear tax debts and you will still need to pay child support and alimony. Most debts, including private student loans, credit card debt, and unsecured loan debt will be discharged with bankruptcy.
Bankruptcy can seriously reduce your credit score in the short term and can remain on your credit report for up to 10 years, so itâs not something to be taken lightly. Your case will also be dismissed if you canât show that you have exhausted all other options.
Differences in Reducing Each Type of Debt
The United States has some of the highest consumer debt in the world. It has become a common part of modern life, but at the same time, we have better options for credit and debt relief, which helps to balance things out a little. Some of the debt relief options at your disposal have been discussed below in relation to each particular type of long-term debt.
The Best Methods for Reducing Loans
If youâre struggling with high-interest loans, debt consolidation can help. A debt consolidation company will provide you with a loan large enough to cover all your debts and in return, they will give you a single long-term debt. This will often have a smaller interest rate and a lower monthly payment, but the term will be much longer, which means youâll pay much more interest overall.
Debt management works in a similar way, only you work directly with a credit union or credit counseling agency and they do all the work for you, before accepting your money and then distributing it to your creditors.
Both forms of debt relief can also help with other unsecured debts. They bring down your debt-to-income ratio, leave you with more disposable income, and allow you to restructure your finances and get your life back on track.
The Best Methods for Reducing Credit Cards
Debt settlement is the ultimate debt relief option and can help you clear all unsecured debt, with many companies specializing in credit card debt.Â
Debt settlement works best when you have lots of derogatory marks and collections, as this is when creditors are more likely to settle. They can negotiate with your creditors for you and clear your debts by an average of 40% to 60%. You just need to pay the full settlement amount and the debt will clear, with the debt settlement company not taking their cut until the entire process has been finalized.
A balance transfer can also help with credit card debt. A balance transfer credit card gives you a 0% APR on all transfers for between 6 and 18 months. Simply move all of your credit card balances into a new balance transfer card and then every cent of your monthly payment will go towards the principal.
The Best Methods for Reducing Secured Debts
Secured debt is a different beast, as your lender can seize the asset if they want to. This makes them much less susceptible to settlement offers and refinancing. However, they will still be keen to avoid the costly foreclosure/repossession process, so contact them as soon as youâre struggling and see if they can offer you anything by way of a grace period or reduced payment.
Most lenders have some form of hardship program and are willing to be flexible if it increases their chances of being repaid in full.
Different Types of Debt is a post from Pocket Your Dollars.
Source: pocketyourdollars.com
All About the Statute of Limitations on Debt
Paying off debt can be an excruciating process, depending on how much money you owe. But your debts may not haunt you forever. Most consumer debts have a statute of limitations. That means that after a certain amount of time has gone by, collectors canât sue you for failing to pay off outstanding debts. Hereâs everything you need to know about the statute of limitations on debt.
See how long itâll take to pay off your credit card debt.
Understanding the Statute of Limitations on Debt
You can be taken to court for not paying off certain debts. But thereâs a limit on how long debt collectors can chase after the borrowers they want to sue.
The period in which someone can take legal action against you for owing money is known as the statute of limitations. In many cases, that time period either begins on the date you last made a payment or when your account becomes delinquent (which usually happens 30 days after a borrower fails to make a payment). But sometimes, the statute of limitations begins whenever you last used the account, acknowledged that you owed debt or agreed to make a payment (more on that later).
Statutes of limitations offer consumers with old debts some protection from debt collection agencies. After the statute of limitations on a debt expires, that unpaid debt is considered to be time-barred. At that point, borrowers no longer have a legal obligation to pay off their debts.
Different states have different statutes of limitations. And there are different rules attached to different types of debts. In Iowa for example, the statute of limitations on credit card debt is 10 years. In Alaska, Alabama and Washington D.C. itâs only three years.
Not all consumer debts have a statute of limitations, however. Federal student loans, for example, havenât had a legal expiration date for over two decades.
What to Do With Time-Barred Debts
While you may no longer be legally responsible for your time-barred debts, youâre not totally off the hook. Most negative credit information â like unpaid debts â can stay on your credit report for up to seven years. But tax liens can remain on your credit report for up to 15 years and bankruptcies can be reported for 10 years.
Not repaying the old debt you owe after the statute of limitations expires could hurt your credit score. And you could have a hard time trying to buy a house or take out a new loan.
Related Article: The Worst Ways to Deal With a Bill Collector
If you decide to pay off an old debt, itâs important to make sure you have documentation confirming that the debt is yours before making a single payment. You may have to pay off your debt in full in order to avoid restarting or extending the statute of limitations on your debt. So talking to a lawyer before making a single payment is a good idea.
When a Collector Asks About Your Time-Barred Debt
Even though you canât be sued for your time-barred debts, a debt collector may try to come after you anyway. Bill collectors are required to follow certain rules under the Fair Debt Collection Practices Act (FDCPA). But they have the right to contact you even after the statute of limitations on a debt runs out. If a debt collector threatens to sue you for a time-barred debt, he or she could be violating the FDCPA.
Statutes of limitations can be tricky. So if youâre not sure whether your debt is past its legal expiration date, itâs a good idea to ask a debt collector who contacts you if your debt is time-barred. If he or she says no, itâs best to ask for the date of the last payment and request written proof that the debt theyâre trying to collect is actually yours.
Youâll need to be careful when speaking to debt collectors, especially when dealing with a debt you believe is time-barred. If you say the wrong thing, the statute of limitations could be restarted or extended and you could end up having to pay a bill collector what you owe. The debt collector could also sue you and win.
The clock on your debt can restart if you admit to owing a debt, promise to start paying it or attempt to start repaying it by sending money to a debt collector. But the guidelines associated with extending and restarting the statute of limitations vary depending on where you live.
Related Article: Understanding Debt
Final Word
If you donât know if the statute of limitations on your debt has expired, you can check with someone from a local legal aid society, an attorney or your state attorney generalâs office. Or you can figure it out yourself by finding out when the statute of limitations begins and looking up your stateâs laws regarding the statute of limitations on debts.
After you can confirm that the statute of limitations on your debt has in fact expired, youâll have to decide what to do with it. You can pay off the debt and improve your credit score or ignore it and wait until it disappears from your credit report. You could also dispute the old debt or try to work out an agreement so that you end up paying less than what you owe your creditor.
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