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How can you safeguard your successor from the debt you carry

March 14th 2013

If you leave this world with a huge debt burden on your shoulder, don’t think that your debt will vanish too. There is a great probability that your debts will haunt your successors and swallow your assets.

Financial planners opine that this scenario is not uncommon since so many old people are knee-deep in debt. Middle-aged people are carrying higher credit card debt than the youths of this country. As per a report released by Demos, a research organization in New York, older people had $8,278 credit card debt on an average. On the other hand, younger people had only $6,258 credit card debt on an average.

The economic scenario of this country is not at all conducive. Not only people have more debt than earlier but also they don’t have sufficient assets to repay debts. The fair market value of the assets has declined has reduced considerably now.

Creditors won’t be able to come after your heirs or assets if you’re insolvent and debts are in your name only. Your successors won’t be responsible for your debt. However, if you’ve enough assets to cover your debts, then creditors will certainly try to access them.

As per the federal laws, your state executor is required to sell your assets and pay back your creditors before allocating them to your heirs. However, there are some assets that your creditors can’t access because of certain laws.

When you enter into the estate planning, make it a point to safeguard your assets from your creditors. If you have debts, then you need to be cautious since federal laws prevent you from giving assets to protected accounts especially to steer clear of creditors. Approach an experienced estate planner since laws vary from state to state.

Here are some steps that you can take to safeguard your survivors and assets from your creditors.

  • 1. Fulfill your financial responsibility: If you pay back your creditors right now, then they won’t your assets and heirs after your death. Sit with your estate planner and calculate how much you owe to creditors. Create a spending plan to stick to a tight budget. Purchase less and save more, then only you’ll be able to fulfill your financial responsibility.
  • 2. Give a clear picture to your successors: Usually, survivors are not aware of the deceased person’s debt. They get the shock of their lives when creditors let them know about the real situation. Some kids spend more than their income in the hope that they’ll inherit a substantial amount after parent’s death. Only later, do they come to know that their hope will never materialize because of a huge amount of debt.

    Do explain your debt situation to your successors. Make a list of your assets, debts and beneficiaries. Let your survivors know the truth. They can come up with a suggestion to avoid disastrous problems later.

  • 3. Purchase life insurance policy: The best part of life insurance policies is that survivors can use them to repay debts on inherited items. For instance: home loan or vehicle. If you have given your car to your survivor without paying off the auto loan, then he/she will inherit the debt as well. You successor can use the cash value of the life insurance to pay off the debt.
  • 4. You can opt for loan protection insurance: If you’re unable to purchase a life insurance policy because of high premiums or age factor, then consider buying a loan protection insurance policy. These insurance policies help to repay loans when you’re disabled or no more in this world. The only problem is that these declining-term insurance policies are very expensive. They are costlier than that of the traditional life insurance policies.

If you’re planning to take out a mortgage loan, then consider buying a mortgage life insurance policy. This is basically a type of loan protection insurance policy. Lenders often offer this insurance policy to borrowers at the time of taking out a loan. If you find it as a sensible option, then just shop around and purchase the policy from reliable lender.

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