Debt after Death: 10 Things You Need to Know

When a loved one passes away, one of the last things you want to hear is debt collectors calling to try to take their money. Unfortunately, dealing with a loved one’s debt is a chore your family will have to take care of. Here’s what you need to know.

Debt After Death

1. Debt Isn’t Inherited

Debt does not pass on to family members. If an account is in one person’s name, creditors can’t make anyone else pay off the debt. If someone dies with debt and no assets to pay it off, the creditors take the loss.

2. Co-Signers Become Fully Liable

One common point of confusion is the responsibility of co-signers to an account. Many people don’t realize that co-signing involves much more than helping with the credit check.

When you co-sign a mortgage, credit card or other loan, you’re saying that you will pay in full if the primary account holder can’t. This includes if they can’t pay due to death, and creditors will coldly enforce this provision.

You should also be aware that some loans may contain a provision that they become payable in full immediately upon either the primary account holder’s or the co-signer’s death. This could require the survivor to refinance the loan, raid their retirement account or take a negative hit to their credit when the original loan defaults.

3. Spouses May Still Share Liability for Individual Accounts

One more exception to the debt isn’t inherited rule is spouses. Some states hold spouses liable for the other’s debt even if the account wasn’t a joint account.

One way this can happen is in community property states where any debts acquired during marriage become marital debts regardless of whose name was on the account.

Another is where courts decide who’s responsible based on who benefited from the debt rather than who signed for it. If debt benefited both spouses or the household as a whole, it becomes the responsibility of both.

4. Creditors Will Still Ask You to Pay

Just because creditors can’t make you pay doesn’t mean they won’t ask you to. Often, they’ll try to guilt you into it by saying things like it would harm the deceased’s honor or that you should do the right thing.

Not only do you not have to pay them, but by agreeing to pay in part or in full — even if you’re just trying to get them off the phone — you could be assuming legal responsibility for the entire debt. Simply tell the creditors to never contact you again, and they must honor your request.

5. Creditors Can Make a Claim Against the Estate

Debt may not be inherited, but it can reduce your inheritance. Creditors get first rights to any property in the estate up to the amount of the outstanding debt.

This applies even to family heirlooms left to a specific person in the will. For a mortgage, creditors can foreclose and take the family home.

If you want to keep a specific piece of property and the estate doesn’t have enough cash to cover outstanding debts, you will have to buy it from the estate at its fair market value.

6. Both You and the Creditors Need to Give Notice

Creditors only have a set period of time to make a claim against an estate. After that, they forfeit any claims.

At the same time, you can’t try to avoid creditors by keeping them in the dark. Depending on your state, you may need to file in probate court, notify creditors directly or take some other action. Failure to follow the rules could extend the creditors’ time to make a claim or leave you personally on the hook for the debts.

7. Don’t Use Credit Accounts

It’s illegal to use a loved one’s credit accounts to pay for things like funeral expenses even if the entire family agrees. Because the account isn’t in your name, it’s considered fraud.

Additionally, you shouldn’t use a loved one’s accounts to pay any bills they owed. Again, you technically don’t have legal authorization to do so. Instead, notify anyone you receive a bill from to cancel the account and contact the estate’s executor.

8. You Should Tell the Credit Bureaus

You should promptly notify the three major credit bureaus of a loved one’s passing. This will prevent identity thieves from trying to assume their identity and open new accounts in their name.

At the same time, the executor can request a copy of their credit report to identify debts that will need to be paid.

9. You Will Need Copies of the Death Certificate

Every time you work with a creditor or go to close an account, you will need to provide a copy of the death certificate. This lets the company know that you have legal authority to take action on the account and that your loved one isn’t faking their death to try to skip out on the debt.

10. The FDCPA Still Applies

The Fair Debt Collection Practices Act and other consumer protections continue to apply after death. If creditors harass you or lie about your responsibility for the debt, you may be able to sue them. If creditors wrongfully report your loved one’s debt on your own credit report, you have the right to have that information removed.

To protect yourself during this difficult time, you may wish to sign up for credit monitoring or other services to keep you one step ahead of identity thieves and unscrupulous debt collectors.

Sources:

  • http://blog.credit.com/2016/11/debt-after-death-10-things-you-need-to-know-162406/
  • https://www.nbcnews.com/better/money/debt-dying-five-things-surviving-family-need-know-n387341
  • https://money.usnews.com/money/personal-finance/articles/2016-06-02/will-your-heirs-have-to-pay-up-when-you-die-with-debt
  • https://www.creditcards.com/credit-card-news/credit-card-debt-death-1282.php

Credit Utilization: Master This Key Scoring Factor

Imagine two people borrowing the same amount of money from the same lender. One has a stellar credit utilization ratio. The other has a relatively poor number. Well, the first person could end up paying thousands of dollars less than the second individual due to a lower interest rate.

Your credit utilization rate accounts for 30 percent of your overall credit score. Given its significance, you should strive to make yours impressive.

Credit Utilization Rate

 

Calculating Credit Utilization

To figure out your credit utilization ratio, take your monthly balance and divide it by your credit limit. Let’s say you have a credit card with a $2,000 limit. Last month, you charged $200 on it. When you divide 200 by 2,000, you get 0.1. Thus, last month’s utilization ratio for that card is 10 percent.

Your credit reporting agency will give you a utilization score for each of your credit cards as well as other types of credit like home equity loans. It will also assign you an overall credit utilization score. The agency will compute that comprehensive number by adding all of your balances and all of your limits and then dividing the first sum by the second.

If your credit utilization score is too high, it’s harder to obtain loans with favorable terms. That’s because potential lenders will see you as someone who charges too much and who may, at some point, have trouble making loan payments.

Know Your (Credit) Limits

For a credit utilization score, the magic number is 30 percent. Try not to go over it. A strong utilization rate is between 10 and 20 percent, and an exceptional one is less than 10 percent.

To stay below the 30 percent mark, always monitor your credit card limits. If a credit card issuer lowers your limit, rely on that card less often. Conversely, if a credit card company raises your limit, you can feel free to use that card a little more frequently. Similarly, keep checking your balances online. If you’re coming close to 30 percent on one of your cards, don’t touch it again until next month.

Your credit card companies might have a program wherein they text you when you’ve hit a certain percentage of your limit. You could ask them to let you know when you’ve reached 20 percent or so.

Credit Card Carefulness

If your credit utilization score is currently higher than 30 percent, don’t worry too much. You can bring it down soon enough. Your first step is to carry more cash and keep more money in your checking account. That way, when you shop for groceries, clothing and other personal items, you can leave your plastic in your purse or wallet.

In addition, don’t shop on the Internet as much. Or, if you must buy products from digital stores, get in the habit of using a debit card rather than a credit card. Always search cyberspace for deals and discounts, too.

Higher Credit Lines

You might want to get in touch with one or more of your credit card issuers to apply for a limit increase. Just be aware that a credit card company must conduct a hard inquiry on anyone who makes such a request. A hard inquiry will probably lower your credit score a little.

Seeking a limit increase carries some risk. If your credit history isn’t in good shape, your credit card company could choose to reduce your limit instead, putting you in an even worse predicament.

On the other hand, if your credit report is exemplary, you could receive a credit limit increase without even asking for it. Either way, with a greater limit, you could spend the same amount of money, but your utilization rate would still go down.

In any event, approach a higher credit limit with caution. When you’re granted one, it’s natural to start spending more. And, unfortunately, it’s easy to go too far. In short order, you could be facing a higher credit utilization rate and mounting debts.

Shaky Strategies

Could you lower your utilization ratio by getting more credit cards and spreading out your spending? It’s possible, but you should resist that idea. A credit reporting agency might view your new credit cards in a negative light and lower your score accordingly. Not to mention, every time you apply for a credit card, the issuer will have to do a hard inquiry.

Plus, with extra credit cards, it becomes more likely that you’ll charge more than you can afford or forget to make a payment.

Give Yourself Some Credit

Finally, it’s a great idea to partner with a credentialed credit repair company. Its team members can study your credit history and find mistakes, questionable entries and other problems that are unfairly bringing your scores down, including your credit utilization ratio. Those pros can then contact your credit reporting agencies and convince them to fix the inaccuracies.

Knowing that your credit utilization number is going in the right direction should give you feelings of pride and security. Getting a low interest rate and advantageous conditions on your next loan or mortgage will feel even better.

Sources:

https://www.forbes.com/sites/financialfinesse/2016/12/04/how-to-improve-your-credit-score-quickly/#69802877499a

http://www.military.com/money/personal-finance/credit-debt-management/what-should-your-credit-utilization-be.html

http://money.cnn.com/2017/05/08/pf/credit-score-tips/index.html

https://money.usnews.com/money/personal-finance/articles/2012/07/24/tips-for-maximizing-your-credit-score-when-it-counts-most

https://www.nerdwallet.com/blog/finance/credit-utilization-improving-winning/

https://www.thebalance.com/understanding-credit-utilization-960451

Improving Your Finances: Debt Settlement vs. Credit Counseling vs. Credit Repair

If you’re struggling with improving your finances, you may have seen several different services offering to help. Each type of service has a different goal, so picking one over the others could change the amount you have to pay toward your debt, and the impact on your credit score may vary by service. Which service you should choose depends on your debt, your goals and budget.

Improving Your Finances

What Are the Basics?

While the broad goal is to improve your financial situation and credit score, each service has a different primary purpose.

  • Debt settlement seeks to reduce the amount you have to pay. This could be by offering a lump sum payment for pennies on the dollar or negotiating a payment plan that won’t pay off the full debt.
  • Credit counseling works on improving your finances  by helping you develop better habits like sticking to a budget and finding ways to pay off your debt as quickly as possible. It may also help you do things such as negotiate for lower interest rates, find a personal loan and use balance transfers, but in most cases, the end goal is to pay off your debt in full.
  • Credit repair focuses primarily on your credit score and removing negative items from your credit report. Paying down your debt may be part of this, but it is only one possible tool, not the ultimate goal.

Is One Type of Service More Legitimate Than the Others?

Many providers who only offer one of the debt settlement, credit counseling or credit repair services will try to diminish the other two services, even to the point of implying that they’re a scam. The truth is that as long as you pick a reputable company, each type of service is perfectly legitimate.

Of course, because the different services have varying methods and potential outcomes, there could be one that is better for improving your finances than the others.

Does the Amount of Debt Matter?

Certain programs may set minimums or maximums for the amount of debt they’ll work with, but the rules aren’t set in stone. There are a few general guidelines to consider:

  • If you’re struggling but still able to make at least your minimum monthly payments each month, credit counseling may help you find a little breathing room without damaging your credit score.
  • If you can’t keep up with your payments but haven’t taken a big credit score hit yet, debt settlement may help minimize the damage.
  • If you’ve already gone into default, had an account charged off, or entered or considered bankruptcy, it may be time to shift your focus to credit repair.

What Happens to My Credit Score?

In terms of credit scoring, there are clear winners and losers when it comes to improving your finances.

  • Credit counseling: Because credit counseling focuses on finding ways to pay your debt in full, it will not hurt your credit score and may actually help you to build positive credit history over time. Even if you negotiate lower interest rates or transfer balances, it still counts as a paid-in-full account.
  • Debt settlement: Debt settlement will almost always lower your credit score. Since the creditor loses money on a settlement, settled accounts are marked negatively on your credit report. However, continuing to add missed payments or having an account charged off could lower your credit score even more.
  • Credit repair: In theory, credit repair can only raise your credit score, but that only tells part of the story. If you switch into credit repair mode before your accounts are paid, settled or discharged in bankruptcy, additional negative items could still be added to your credit report.

How Long Does it Take?

There are no clear-cut answer for the amount of time it will take improving your finances and each service. It varies widely based on your exact situation.

  • Credit counseling often involves either one-on-one sessions or attending classes. Depending on the timing and how quickly you’re able to follow their suggestions, you could start seeing results in days or weeks. Bigger changes, and actually paying your debt completely off, could take months or even a few years.
  • Debt settlement depends entirely on the status of your account. If you have an account in collections with a debt collector willing to settle, it may take a single phone call. If you have a high credit card balance but have managed to make your minimum payments on time, the issuer may require you to enter into a special program before they’re willing to settle. Overall, expect anywhere from a few weeks to a few months.
  • Credit repair is another process that can take anywhere from days to months. Creditors have 30 days to respond to credit bureau disputes or updated information on an open dispute. Some may fix obvious errors faster, but there is often a processing backlog that pushes them right up against the deadline. If you’re trying tactics like goodwill letters or pay-for-deletes, expect several rounds of back-and-forth letters or phone tag.

Which Should I Choose?

When you consider the above information and how willing you are to spend your limited free time, the answer may be all three. Remember, credit counseling will help with improving your finances by teaching you good spending habits, debt settlement will help with debts you can’t pay in full and credit repair will help reverse damage to your credit report. Whether you need one, two or all of these services, you are free to customize a plan that meets your needs.

Sources:

  • https://www.experian.com/blogs/ask-experian/the-difference-between-credit-counseling-and-debt-settlement-2/
  • https://www.consumerfinance.gov/ask-cfpb/whats-the-difference-between-a-credit-counselor-and-a-debt-settlement-company-en-1449/
  • https://www.consumerfinance.gov/ask-cfpb/what-is-credit-counseling-en-1451/
  • https://www.consumerfinance.gov/ask-cfpb/what-are-debt-settlementdebt-relief-services-and-should-i-use-them-en-1457/
  • https://www.consumerfinance.gov/ask-cfpb/a-credit-repair-firm-sent-me-an-offer-outlining-their-credit-repair-program-should-i-enroll-en-327/
  • http://blog.quizzle.com/2010/09/debt-consolidation-vs-credit-counseling-which-is-right-for-you/
  • http://www.bankrate.com/finance/debt/debt-management-vs-settlement.aspx