Does Your Debt Die With You?

death of credit1

My daughter asked me this question while having dinner at her house.  It started with me complaining about how some of my boomer friends were living beyond their means and had mountains of debt. I had to reassure her that we were not in that situation. (It is not uncommon that your family dinner conversations included some financial topics)

I explained that she and her brother had nothing to worry about. Children are not responsible for any debts belonging to their parents.

Generally, the estate pays off debts, as long as there’s enough money in an estate to pay them all off. Any remaining money goes to beneficiaries. There is an order to how debts must be repaid. Funeral expenses, income & estate taxes and secured debts are the top. Unsecured debts, such as credit cards, lines of credit are near the bottom. If the estate does not have enough money to pay back all the debt, creditors are out of luck.

Remember that jewelry, antiques and other valuables must all be added to the total value of the estate. You might be forced to sell some of them in order to pay back creditors. Very important, the executor of the will could be liable if he or she pays money out to the beneficiaries from the estate before all the debts are settled, creditors could make a claim against the executor personally.

Creditors could also go after an individual’s retirement account and proceeds from a life insurance policy if no person is named as beneficiary. Those funds would automatically be included into the total value of the estate. However, in Canada, retirement accounts can to transferred tax-free to the surviving spouse.

Joint ownership or loans that have been co-signed are different. You will be responsible to pay them back. You don’t inherit your parents’ or your children’s debts unless you guaranteed them.

It is very important for young people to check their own credit report periodically to make sure you are not still holding debt for someone who isn’t in your life anymore. Credit cards that you have co-signed years back may still be active and you could be also on the hook for apartment leases even if you moved out.

Estate laws vary depending upon where you live and can be very complex. Get some good legal advice, talk to a tax specialist and pick a knowledgeable executor. You can’t take it with you! However, avoid giving it to the tax man and leave something to your love ones instead.

 

death of credit

 

 

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5 thoughts on “Does Your Debt Die With You?

  1. Very interesting blog post. It took me 19 years to pay off four years of student loan debt and I know many people who know they will never rid themselves of theirs.

    On another note, I have a question that’s somewhat related.

    In an effort to rid myself of all interest-bearing debt, like I stated above, I paid off my student loans. Now I’m making extra payments to eliminate my car loan. The idea being that, since I have no credit card debt, I would then be free to save for a sailboat while paying off the home mortgage.

    However, my older brother suggested I don’t pay off the car as quickly for two reasons:

    Depreciation and the fact that if totaled, I’d only receive what my 2012 Honda CRV is worth now – which is less than I’ve already paid for it.

    Since I only have one other form of credit (the home loan), I’d need the car loan to help establish my credit when it’s time to obtain a boat loan.

    Just wanted to know your thoughts. Should I continue paying the car quickly or keep part of the loan (I’m down to about $6k on a $24 car) to help establish my credit?

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    • In general, banks look at your credit score and your debt to income ratio. Paying off your car loan would increase your credit score and reduce your debt to income ratio which would help you to finance the boat. However, banks may require a larger down payment on a boat compared to buying a car. I suggest you find out how much of the boat purchase price they would be willing to finance first.

      In Canada, your boat loan would be refused if the total monthly boat payments + car payments+ house payments + property taxes exceeded 40% of your family’s gross monthly income.

      Many years ago, I was surprised that the bank would only finance 60% of the purchase price of an industrial building that I was thinking about buying. Even though the mortgage payments would have been less than the rent that I was paying.

      If I was a betting man, I would bet that the bank will ask you to get a home equity loan to pay for the boat.

      Rico

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  2. Once again, thanks for the information. As I used to state in my blog – always find a mentor so that you’re beginning from a position of power instead of completly alone. I can honestly say you’re a mentor of mine when it comes to the financial world.

    Like

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