Aging Parents and Debt—How to Protect Your Credit from the Backlash
Losing a parent is never easy, especially if you are responsible for settling their estate. The emotional turmoil coupled with logistic concerns is more than many people can handle. To make matters worse, you may be responsible for paying your parents’ debts, resulting in lost income and potential credit score damage. When your parents pass away, what will you owe? Read on to learn the answers.
Step One: Protecting Your Credit
Credit damage is usually the last priority when faced with the loss of a parent. However, the reality of mounting bills could make a world of difference. Prepare yourself by learning more about what you owe, including:
• Joint accounts.
If you opened an account with your parent, be prepared to assume responsibility in the event of death. Joint account holders are dually responsible for remaining debts and terms. Keep your credit out of harm’s way by dealing with these accounts immediately. (Note: this issue does not apply to authorized users).
• Cosigned accounts.
Cosigning is a risky venture no matter who asks you to do it. Not only does the debt appear on your credit report, it becomes your responsibility if the primary borrower cannot pay. In the case of a dying parent, creditors will expect you to step up to the plate and keep paying the debt. Take control of the situation by calling the creditor directly. Explain the situation and ask them to go over the terms of your cosigning. If you are unable to pay, ask them about forbearance options to lessen the burden and protect your credit score.
Step Two: Protecting the Estate
Although the factors above represent the main threats to your credit score, there are other factors that could impact your family as well. After a death, inherited funds and property are usually placed into an estate, allowing creditors to file claims in order to settle outstanding balances. While this process will not hurt the beneficiary, be prepared to make some tough choices. Consider the following example:
John’s father recently passed away, leaving him the family home and $30,000 in life insurance. Although the home is paid for, John learned of a $15,000 tax lien on the home shortly after inheriting it. To avoid seizure, he was forced to use half of his inherited money to cover the tax lien.
John’s situation is a common one. Before distributing inherited items, set up an estate to ensure that all debts are paid.
Step Three: Knowing Your Rights
Few people learn about beneficiary rights until it’s too late. When you are forced to handle an ailing parent’s finances, it’s important to understand what you should do—and what you shouldn’t. Let the estate do its work and do NOT:
• Feel overwhelmed.
Aside from the factors in Step One, most financial issues do not require your immediate attention. Estate settlements can take months.
• Deal with bill collectors.
Many bill collectors will tell you that it’s your moral obligation to settle your parents’ debts. In fact, you are under no personal obligation at all. Your estate lawyer will speak with creditors and collectors to determine the bottom line. Refer all questions and comments to their office and instruct other family members to do the same.
• Assume penalties and fees.
The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 prohibits creditors from charging late, annual, and penalty fees during an estate settlement.
• Sacrifice retirement accounts.
ERISA-covered retirement accounts are given directly to beneficiaries and should never cover outstanding debts. Don’t allow collection agencies to tell you otherwise.