Can you inherit your loved one’s debt?

by | Sep 12, 2022 | Personal Finance

Dealing with debt after the passing of a loved one

Debt is one of the scariest things in the world! However, have you considered what would happen to your debt if you were to die? You might think it’ll disappear, but you’d be wrong. In the event of someone’s death, his assets and liabilities are transferred to his estate, the estate is then responsible for paying off debts and distributing assets as per Will specifications. If the assets are distributed to them before the debts are settled, heirs may have to pay the debts from their share of the estate.

Before we even delve into the debt itself another important money aspect to consider upon a loved ones passing is tax. Not only does tax not disappear upon death, but it may even go up. If an estate earns income after death, it must pay taxes. The heirs of the estate may also have to pay taxes on inherited income. Additionally, an estate tax may apply to the estate’s assets, which is separate from the income tax.

Getting back to the debt issue, how debt is dealt with after death is largely informed by whether the debt is secured or not. This is why it is important to first determine whether the debt is secured or unsecured. Secured debts are those that are guaranteed against specific assets. These are tangible items taken as security for loan repayments so that if you stop making payments, the bank can sell or use certain property to recover the amount you owe. Unsecured debts are the opposite of this. There is nothing attached to the debt and if you were stop making payments on your account, the bank will not have anything to repossess. In these instances, in order to pay off your debt, the bank must go to court and get an order charging for the sale of your valuables to recover the funds.

When it comes to secured debt and the person owing passing away, it is the responsibility of the person who inherits the house to pay off the mortgage if the deceased had a mortgage on her home. In the case of a joint mortgage, the survivor is still responsible for the balance. Keep in mind that the house serves as collateral for the debt. So, if the debt is not repaid, the bank can repossess the house and sell it to pay off the debt.

The repayment of unsecured debt, on the other hand, is solely dependent on whether there is enough money or assets to service the debt in the deceased’s estate. While collection agencies may try to convince the heirs that they are legally required to pay the debts with their own money, the fact of the matter is, unless they were a co-signer to the debt, no one else has to pay anything towards the unsecured debt of the deceased. Inheriting someone’s unsecured debt is only possible if the estate is dissolved and distributed before the debts are settled.

One type of debt that can be forgiven after death is student loan debt. This can be upon the death of the borrower, or sometimes, the borrower’s parents. In these instances, proof of death has to be provided to either the school or the lender.

The last thing that anyone would want in life is to find that at the time of their passing, rather than leaving a lucrative inheritance for their loved ones, they instead leave them with a major debt. Luckily, it is never too late to turn things around and still leave a worthwhile legacy for your family instead of debt. Here are a few tips for making this happen.


Credit life insurance.

 Designed to serve as a protective layer for any eventuality that could possibly prevent you from being able to foot your debt bill, credit life insurance can remove a huge burden on those left behind, if you were to die while still servicing a debt. It covers the cost of your debt if you are, for one reason or another, no longer able to pay it back. This could be either due to disability, unemployment, or death. This insurance is a great way to ensure your family does not become homeless and/or overindebted due to an overwhelming debt inheritance.


An insurance policy for death in service.

 In some cases, employers provide death benefits for their employees if they die in service. In the event of the employee’s death while still on the payroll, a designated beneficiary will receive a lump sum. As a result, the family that remains will be less likely to face financial hardship.


Life cover.

Life insurance policies operate in such a way that when the policyholder dies, the beneficiary receives a cash sum. There are also other circumstances where the cover pays out, such as critical illness. Sometimes your life insurance can also be used to pay off your debts when you pass away so that you do not leave your family with having to face your debt problem after you die.


Investments and savings accounts.

There are numerous investments and savings accounts you can use to make sure you leave a healthy financial legacy for your family. Dead or alive, savings and investments are an essential part of any healthy financial management plan. Saving works better for shorter term financial goals as well as for emergencies. While investments focus more on building wealth in the long term. A combination of both these tools could ensure your estate is in a healthy condition for your beneficiaries to appreciate even long after your pass away.


Smart money management and family budgeting habits. 

When all is said and done the most important legacy that anyone could leave behind are the life lessons that they teach while they’re still alive. Give your family the gift that keeps on giving by instilling valuable money management tactics within the household. You can develop many positive habits and long-term techniques to help keep your credit score healthy as well as prevent debt from becoming a significant issue for you and your family.

It is true that there are ways to minimize and mitigate family members inheriting debt, but the best way to ensure we leave only positive things behind when we die is to maximize our wealth and financial wellbeing now. The most important thing is to leave a positive legacy for those we love – both emotionally and financially. Even though many things are out of our control, we can, from a financial standpoint, take the necessary steps to ensure that our estate will be in good shape. Also be sure to create or update your will to ensure that your estate is bequeathed according to your wishes.

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