Karl Eggerss was interviewed by CBS’s Sharon Ko regarding inherited debt. When an individual passes away, oftentimes there is confusion as to who is responsible for that debt. Karl explains.
Sharon Ko: When a loved one dies, the last thing you want to be getting is calls from debt collectors. Here’s how to avoid that and what you can do to make sure you don’t leave behind a financial burden.
Karl Eggerss: Generally speaking, if somebody signs for the debt, so you know you go to get a loan and either one person can sign on it or two or maybe even three, and those people are responsible for paying that back. And so if somebody signs individually, then somebody else isn’t responsible. Now where people get into trouble sometimes is their parents have passed away and the people that have borrowed the money are passed away. Well, the credit card companies are going to send collectors and they use scare tactics and they’re going to come and call you the child and say, you owe us for this because it was your parents. You don’t owe. You did not sign for that debt. So rarely is somebody on the hook for somebody else’s debt unless they signed the loan.
Now when it comes to, is a deceased person responsible for their debt? The answer is yes. If they had assets. So generally what happens is when somebody passes away, they look at their balance sheet, they look at their assets and their liabilities, and they take the assets and they pay off the debt with it. But if there are no assets there, then the debt usually is forgiven because there’s nobody there to pay it back.
Sharon Ko: I think this is a good reminder about life insurance because that can really help when it comes to the debt that a person can face because creditors can’t touch that.
Karl Eggerss: Yeah, it’s a good rule of thumb, generally speaking, that if there’s a beneficiary on an account such as a 401k, an IRA or life insurance, the beneficiary gets that money. It does not go to pay off the debt. Now there’s an ethical issue here, but legally speaking, if something has a named beneficiary, that’s who gets the money. It does not go towards the debt. Some people will put the beneficiary as their estate and if they do that, the estate is responsible to pay off the debt.
Sharon Ko: And speaking of beneficiaries, make sure that they’re living update that.
Karl Eggerss: Yeah, it’s a good thing. Once a year, we always kind of check on in January. It’s just a good start of the new year. You know, people make their new year’s resolutions. This is the time to start thinking about going and checking your beneficiaries. Or you may just have changed your wishes. It could be somebody passed away and they’re not a beneficiary anymore, but it could be that you just changed your mind and you have different beneficiaries.
Usually on a beneficiary form, there’s primary and contingent. Primary as who gets it, but if they’re deceased, it kicks into the contingent ones. But with any of this stuff, there are very complicated extenuating circumstances. And if there’s a complicated situation, always seek out a financial advisor or an attorney because there may be some rules and specific situations-
Sharon Ko: Thanks so much to Karl Eggerss.