Understanding Debt Inheritance Laws and the Appropriate Course of Action
No matter how well you manage your finances, there are times when unexpected distress, such as an unpaid debt from a deceased loved one, can cause concern. In this article, we will look at the finer points of debt inheritance laws and the proper course of action in such a situation.
Debt After Death: Understanding the Results
Typically, the executor of a deceased person or their testator is responsible for managing and finding ways to settle the debt. If the deceased has sufficient assets, the executor must take steps to:
- Control and manage all liquid assets, cash, and real estate.
- Repay all outstanding debts in order of priority. Once the debts are paid off, the remaining assets are passed on to the beneficiaries.
If a debt remains, creditors will usually cancel it. However, there are cases where the debt is passed on to a relative or friend, resulting in ‘debt inheritance’.
When Do You Inherit Your Loved One’s Debt?
Your loved one’s debt may be passed on to you in any of the following situations:
When You Are a Joint or Co-Signer Account Holder
This usually applies to unsecured debt such as personal and student loans, and credit cards. If you are a co-signer or co-holder on the deceased’s account, you will be held responsible for their financial obligations. You will also have to settle their mortgages and car loans, if any, but the balances on these loans will not be immediately due upon the person’s death due to the federal government’s directive against accelerating loan balances.
When You Are the Wife or Husband of the Deceased
If you are the spouse of the deceased and live in a community property state such as Idaho, Louisiana, Nevada, and Arizona, the remaining debt will be passed on to you. In community property states, the income of the wife or husband during their marriage is considered state property and the debts incurred during this time are debts of the couple. In such a situation, it is best to seek legal advice.
How to Avoid Debt Inheritance?
Fortunately, there are ways to prevent and exit from such unexpected distress:
Life Insurance Investment
Life insurance is a good way to cover the costs of your deceased spouse’s debts and other expenses. Talk to your loved one about investing in an insurance policy. Ideally, you should take the lead as soon as possible, as age and medical conditions are crucial factors that determine the qualification and terms of life insurance policies.
Adopting good financial or spending habits is a sure way to help you deal with your loved one’s debt. Disciplined spending habits, good budget planning, and a frugal lifestyle help you save money that you can later use to pay off debt.
How to Avoid Unwarranted Collection Calls?
It is important to know when you are or can be held responsible for the debts of your deceased relative or friend. This is especially important to ensure that collection agencies do not mistakenly attempt to collect from you. If you receive unwarranted collection calls, speak to an attorney or write a letter using certified mail telling the collection agency to stop contacting you.
The Path to Follow
Although you may not have control over such unexpected distress, you certainly have full control over the future. Even if you find yourself on the receiving end of a debt that you can’t afford to pay, don’t lose hope or ignore the obligation. Instead, seek advice from a credit management expert to help you create a customized repayment plan that will allow you to pay off the debt without affecting your current expenses. To learn more about how credit repair professionals can help you pay off debt.