10 Ways to Protect Yourself from Inheriting Debt

Having to cope with losing a loved one is difficult. As you mourn you’ll, unfortunately, have to think about the financial implications that come with the death. Outside of figuring out how much the funeral will cost, you might be wondering about the debt left behind and who will be in charge of it now. But can you avoid inheriting debt?

The short answer is ‘no’, but there are some exceptions. Below are a few of these situations:

  • You co-signer on a loan, the co-signer owes the debt
  • You are a joint account holder on a credit card, the joint account holder owes the debt.
  • If state law requires a spouse to pay a particular type of debt
  • In community property states, the surviving spouse may be required to use community property to pay the debts of a deceased spouse.

If there was no joint account, co-signer, or other exception, only the estate of the deceased person owes the debt. So how do you protect yourself from these exceptions? Here are 10 ways to avoid inheriting debt.

Do Not Co-Sign or Take on Joint Debt

When you Co-sign debt, this means that if the borrower stops paying for any reason, including death, you will be held responsible for the balance.

If co-signing is the only option, make you have a backup plan such as life insurance to help pay off the debt in the event of the other co-signers death. Appropriate life insurance coverage could resolve this issue since the debt would be paid in full upon the death of the borrower.

RELATED: Cosigning Vs. Collateral: Which Is the Better Path

 Avoid Supplementary Credit Cards

There are instances that family members are given a supplementary credit card for their convenience. But, some companies can hold the supplementary cardholder equally responsible for repaying the entire balance. If you are a supplementary cardholder, and the primary cardholder passes away but you decide not to make payments on the account following their death, you may find negative entries on your credit report.

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Open a Term Life Insurance Policy

If you are concerned about your loved ones inheriting debt, there are certain steps you can take now. Many people with joint debts or who have co-signed loans with a loved one take out a term life insurance policy to pay off these debts. In doing so, the debts do not “live on” for the co-signer or co-borrower.

Having insurance to cover co-signed loans or to pay off leftover mortgage fees can be a massive help for ensuring the smooth transition of your estate to your loved ones.

RELATED: How Much Life Insurance Do You Really Need

Estate Planning

Talking about death can be very uncomfortable, so it can help to have an open conversation about debt in general instead. You might find that they’re just as worried as you are about passing along their debt to you. This conversation can help dispel myths and lead to an understanding of everyone’s debt situation.

Eventually, you may want to work your way up to talking about what to do about debt after you or they die — but it’s important to do this at your own pace so you can have as open and frank a conversation as possible.

Create a Will

It’s always a good idea to create a will of your own, so you can state exactly how you would like your estate to be distributed. This ensures that your chosen beneficiaries receive the proceeds that you want.

When creating a will, it’s important to have it thoroughly checked by a trustworthy attorney and to create multiple copies of the will which can be left with your estate’s executor and others.

RELATED: 5 Reasons Millennials Can’t Afford to Not Have a Will

Set up a Repayment Plan to Get Yourself Out of Debt

If you have debt, address it as soon as possible, and learn what your options are and what would happen if you don’t pay it off. There are various debt repayment options and strategies you can use to pay off your debt.

If your plan does not get you debt-free within a reasonable timeframe, you may want to consider getting some professional advice.

Notify Creditors and Credit Bureaus

Creditors and credit bureaus need to know about your loved one’s death as soon as possible. This is another job for the executor of the estate. Here’s what the executor needs to do:

  • Notify all three credit bureaus—Equifax, Experian, and TransUnion—about the death, and ask that they place a “Deceased: Do not issue credit” notice on the person’s file
  • Obtain a copy of the deceased person’s credit report to see what type of obligations they had.
  • Contact all the deceased person’s creditors to let them know that the individual has died.
  • Contact the Social Security Administration to make sure they note the person’s death.

Be Aware of Community Property States

In most states, surviving partners are not liable for their spouses’ personal debts. In community property states—Alaska (optional), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin—however, they are. Surviving spouses in these states are responsible for their deceased partners’ debts, including any debts they didn’t know about.

Summary

As you see from the tips above, you can end up inheriting debt from your loved ones if you cosigned for that debt or live in a community property state in the case of married couples. If you’re concerned about inheriting debts, consider talking to your loved ones 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.