Debt After Death

Personal debt has become pervasive. All generations now tend to carry that burden. And, death, of course, is inevitable. Therefore, a financial question frequently being asked is: What happens to the debt after a person dies? Are the survivors stuck paying it off?

The issue emerges, for example, when the terminally ill want to get their financial affairs in order. It also gets factored in when the healthy calculate how much life insurance to buy. They wonder if the amount should cover what is likely to be their average outstanding debt so that their loved ones are not saddled with it upon their death.

The simple answer is that all the unsecured debt belonging only to that person vanishes upon the death. Therefore, that is one less thing for the dying to fret about. And in calculating the amount of insurance policies, many debtors will not have to factor in unsecured debt. “Unsecured” means no assets backing it as collateral, such as real estate, a vehicle, or a business. Therefore, the credit card companies, which provide those lines of credit unbacked by anything, are out of luck. They may attempt to intimidate, with threatening letters and phone calls, the survivors. They can contend that the survivors must pay off the credit cards. However, credit card companies have no legal claim. Should the harassment continue, survivors can send a certified letter stating they know their legal standing and that they are not responsible for the debt.

But most things aren’t simple. Neither is debt upon death, which is governed by state law. For example, that $40,000 in credit card debt might have been charged on a “joint account,” where more than one person signed for it. That other person might never have used the account or has even forgotten co-signing. But state law mandates that he or she must pay off the balance. This happens frequently in a marriage, a divorce in which one party agrees to pay off the debt but dies before doing so, when parents co-sign for children, and when adult children co-sign for their aging parents. Obviously, co-signing is never a good idea. The financial industry is innovative and there are always new vehicles for managing and monitoring someone else’s account without becoming a co-signer. Some of those are apps for the smartphone.

Those who are “authorized users,” not co-signers, do not inherit the debt. That holds whether they use the card or not. They could be liable for criminal charges, though, if, as authorized users, they run up extraordinary charges when they know the person is dying and won’t be able to pay off the balance. Also criminal is to use the card after the death.

Should there be an estate, then before heirs get anything, creditors have first grabs, beginning with the secured ones. If that auto loan is for $10,000 and car’s market value is $3,000, then the finance companies will try to make themselves whole by deducting the remainder from the estate. Should the estate have $30,000 in cash and the only creditors are credit card companies with a collective balance of $25,000, then they can collect on that directly from the estate. That leaves the heirs with only a $5,000 inheritance. If there is only $10,000 in cash but there are assets such as paintings, then those credit card companies will legally require that the assets be sold and they be reimbursed from the proceeds.

Things get a lot more complex in what are known as “community property states.” That means that everything, both assets and liabilities, is shared by both husband and wife. That traditionally holds, even if the spouse’s name is not on an account such as a credit card. Those states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, and Texas. That is why those planning to marry, who are already married in community property states, or who relocate there should consult with a lawyer. They need to know in detail what their financial obligations are, what they can be in the future, and what ways there are to protect themselves from the others’ debts.

There are those, of course, who want to do the “right thing,” not just comply with the law. They include relatives who pay off credit card debt, even when not legally obliged. One motivation is to “clear” the deceased’s name. Creditors welcome that behavior and will tend not to persuade the person to do otherwise. Ethics and legal are often far apart in what is required.

Renter’s Insurance: Coverage of Diverse Risks

All insurance, including renter’s, is a hedge against risk. The problem with renter’s insurance is that not many understand the risks it can cover. That might be the reason, according to the Insurance Information Institute (III) survey conducted by ORC International, only 31% of renters have it. Because it is not mandated by law or lenders, as with cars and homes, many never take the time to investigate this financial matter.

The reality is that renter’s insurance covers a broad spectrum of risk. The most basic is the cost of replacing personal property lost through fire, broken pipes, lightning, vandalism, car crashing into the premise, electrical surge, civil unrest, or volcano. Not until renters take an inventory of their belongings do they realize replacing them may total about $20,000. If the rental is of a house, not an apartment, that could be far more.

However, also to be factored in is the cost of alternate lodging if the premise is not habitable. That could put the average middle-class person in a financial hole. If the destruction has been caused not by water damage such as from a broken pipe but from a flood, then the renter is not protected by the standard policy. Hurricane Sandy victims found that out too late. Lesson learned: Read the policy. Separate flood insurance has be purchased. Although provided by the federal government, it is available through insurance companies.

A third kind of risk is legal liability, the kind that could trigger bankruptcy. That could result from an injury which occurs on the premises. According to the National Safety Council, one in 17 Americans had an injury indoors that required medical care. Victims could sue not only for reimbursement for medical care, ongoing therapy, and permanent disability, they could also claim there was negligence in how the renter maintained the premise.

Given the financial implications of the risks, the cost of renter’s insurance is relatively small. In a non-urban area that does not have a high crime rate, according to III, that could be about $200 annually. By bundling that with auto and other kinds of insurance, the price could be lower. Also, there are discounts for having security measures such as burglar alarms, deadbolt locks, and smoke detectors, as well as for those over 55 and the retired.

The hard work is the decision-making about the terms and conditions of the policy. Research can be done on the web under the keywords “renter’s insurance.” Essentially the main decisions deal with:

Overall amount

Policies are written for a fixed amount, not for coverage of certain individual items. To make this decision it makes sense to take a detailed inventory of the value of property, taking into consideration what the cost of replacing it would be. The desk which cost $20 at a flea market 20 years ago, now considered an antique, might have a replacement cost of $5,0000. To ensure proper payment, it is common sense to save receipts, get appraisals, and do a video recording of the content of the premises.

Actual versus replacement value

Some insurers write policies based on the value of the item when the loss occurred. That is known as Actual Cash Value. The laptop purchased for $700 may be worth only $100 four years later. The other option is Replacement Value. That same laptop might cost $545 today.

Deductible

As with all insurance, the higher the deductible, the lower the premium. This makes especially good sense with renter’s insurance since a claim is not usually filed for petty losses. That is because filing claims or multiple ones within a certain time period frequently flags the buyer as a poor risk. In the near future, it could be impossible to get any kind of renter’s insurance.

Dogs

Some insurance companies will not write policies covering certain breeds of dogs. Research on this is as simple as contacting a few and finding out their contract stipulations. If pit bulls are not covered, then the renter has to decide whether to go without insurance or to negotiate a special contract.

Special items

Property of high value, ranging from collectibles to diamond rings, requires riders to standard policies. The cost is high. There are alternate risk reducers, such as maintaining the items in containers which are fire- and waterproof, and kept where thieves are unlikely to search.

Rational people can have very different attitudes toward risk, points out Ken Binmore in his book Game Theory: A Very Short Introduction. If one agrees with that, there are no right or wrong answers about purchasing renter’s insurance, how much, and with what terms and conditions. However, if disaster strikes, the victims without renter’s insurance might conclude they operated on a bad set of assumptions.

You Don’t Have to Be Debt-Free to Save for the Future

Consumer debt in the United States is near an all time high, and if you are holding any, it can be easy to justify not saving money. While a major bulk of the nearly 16 trillion dollars of debt is in the form of mortgages, student loans and credit cards consist of close to 2 trillion dollars of it (see USDebtClock.org). For consumers trying to pay down the latter two forms of debt, it can be particularly difficult to find any margin to set aside for a rainy day or savings for the future. As hard as it may be, it is wise to do everything in your power to begin contributing to an emergency fund, and then a retirement savings account, even in the midst of debt repayment.

Emergency Funds

Though you have most likely heard (or read) several exhortations from financial pundits or concerned family and friends about a “rainy day fund”, pleas for you to begin and maintain an account for emergency savings are hardly ever redundant. If you have already set your mind and will to paying off your debt, you likely want to do it as soon as possible. That mentality should be commended. However, if you are using all of your liquid assets to pay your creditor back each month, just a small mishap might force you to borrow again (and thus add to your debt). In addition to the advice of storing up 3 to 6 months worth of funds to cover expenses in the event of a costly circumstance, the ease of conversion factor should also be a consideration. You may have some convertible assets like a car or diamond necklace that you consider “sell if I have to” items, but you still need to factor in how long it would (realistically) take to convert them into the cash you would need to cover an auto repair or a family member’s medical expenses, for example. Markets and market demand change quickly, and it could take you longer than you think to convert your things into cash.

Savings and checking accounts are the easiest options for these emergency savings, as most of them gain interest but don’t penalize you for withdrawing funds (unless the account has particular minimum balance requirements). A lot of savings accounts come with an ATM card or checks for easy access, but if not, an ACH fund transfer to a linked checking account is a simple workaround. Certificates of Deposit can be utilized as well, but timing is a little trickier. Most CDs come with early withdrawal penalties that would force you to give up some of your interest if necessity demanded you take money out in an emergency situation. That is, unless you could perfectly time your financial emergencies to occur during the grace period between CD terms. Bank5 Connect offers all of these products, and with some of the best interest rates available nationwide.

Retirement Savings

If you can establish a healthy emergency fund, then you will have built a great foundation upon which to focus on more long-term savings. Many consumers focus on paying off their student loan and credit card debt once they’ve established some emergency savings, but depending on the interest rates of your loan(s), it could be beneficial to maintain some level of dedication to savings. If your loans are accumulating interest at a lower rate than the returns you expect to be making on your retirement investments, then reducing loan payments in order to profit from the margin may be a wise move. That margin could ultimately help you pay off your loans more quickly in the long run. There are numerous places to look for investment options, from insurance products to mutual funds to IRAs. If you are able to open and fund a long-term retirement vehicle early on, you will have more years with which to potentially benefit from the power of compounding growth.

Finding Margin

Obviously, it would be easy to build both an emergency and retirement savings fund if you actually had some margin to spare between money coming in and expenses going out. As the economy continues its struggle to rebound from the recession, finding places to create this margin is no simple task. In addition to the above strategy of redirecting some debt repayment funds, you should also maximize the benefit of any employer’s retirement contribution matching program. For low and average income workers, taking advantage of the saver’s tax credit is another great avenue to increase the effectiveness of your saving efforts. Also, though it sounds minor, paying your bills on time (as opposed to early) will give those funds in an interest-yielding deposit account more days to accumulate interest.

Making the push to get your emergency savings account set up is a crucial first step to striking a workable balance between growing savings for the future and shedding debt in the present. Though everyone with consumer debt has a unique situation, the above tools should help you evaluate the most effective (and profitable) path to taking advantage of potential savings opportunities.


Patrick Russo writes for DepositAccounts.com, a website that monitors products and rates at more than 7,500 banks and credit unions and pairs that information with comprehensive commentary, reviews, tools, and community forums to equip and guide depository banking consumers.

Buying Versus Renting: Non-financial Factors

Some economic experts, such as Tyler Cowen of George Mason University, have become bullish on U.S. GDP growth. Therefore, consumers again may be considering those big-ticket items such as buying a house. The financial information about purchasing versus buying is all around. Now famous is The New York Times calculator for weighing the two options. However, less attention has been paid to the non-financial factors to consider. This blog explores five of them, both pro and con.

Children able to be children

Landlords and other tenants usually have plenty to say when children in rentals behave like the young, not totally socialized creatures they are. The criticism can be traumatic for both the children and parents. Those who want to duck this menace would tend to purchase their own house, preferably with a large yard. Historically, for this they are willing to make tremendous sacrifices such as long commutes and working two jobs.

Not that home ownership is without constraints. Neighbors often have their own values about how children should conduct themselves. Also, the median age in the neighborhood might be tilting upward, with older residents not welcoming children. Before buying, parents must investigate the neighborhood norms and demographics.

Feelings of belonging and security

According to the U.S. Census Bureau’s 2012 report, 65.4 percent of Americans are homeowners. Among the motivations for that are the intangibles. They range from feeling a part of the neighborhood to having ownership of something. Those in the community tend to treat homeowners with more respect and attention than they do renters. Also, having property, which the laws of capitalism protect, remains a key value in American life. For those with those needs, not owning a home could represent a diminished quality of life.

Myth of freedom

Folks like to assume that their home, if they purchase it, is their castle. The reality is that communities, concerned with keeping up property values, have a maze of rules. Those could include how many pets can inhabit one residence, if a shed can be located in the back yard, and the time period for shoveling the walk. In addition, insurance companies have their own strict terms and conditions about what will be covered. For example, certain breeds of dogs are forbidden. The irony is that renters, since the community is not invested in them, often have more personal freedom. If the landlord is just happy to get the rent on time, they may be able to get away with more than property owners.

Ability to keep up with maintenance

For everything from external repairs to snow removal, the buck stops with the house owner. Since many people are investing more time and energy in making a living, maintenance might prove to be too much of a commitment. Farming out the tasks costs. Also there is aging. Pushing a lawnmower may go from difficult to impossible.

For those in condos and co-ops, those services are provided for a fee. The problem is that the fee is not capped and the monthly charge can rise significantly. In addition, to preserve the value of the purchase, condo and co-op dwellers still could be faced with internal renovations. Renters, since they’re not focused on improving the landlord’s property, have no such nagging concern.

Limits on relocation

Home owners who lost their jobs or businesses during The Great Recession often encountered a cruel lesson. Because they could not sell or rent their home, their options for trying to earn a living were restricted. Essentially they were stuck in areas of high unemployment or limited business prospects.

Although the economy might have improved, it remains volatile. That good job might be gone tomorrow. Anchor clients might take their business elsewhere. With gas costs so high, a long commute to a comparable job or a better business location might not be possible. Pulling out of a lease, even when paying penalties and moving costs, is a lot more doable than trying to sell a house. Since fewer employers are including purchasing a house in the hiring package, from the get-go more job hunters are making it known that they are renters, therefore moving won’t be a distraction for them.

Aside from the financial considerations of buying versus renting, there are no right or wrong answers in making this decision. Also, situations change. The aging couple might inherit a windfall and be able to afford to pay, without a sweat, for the maintenance and renovations. Therefore, after renting for years they can purchase the house of their dreams.

Every Step of the Way (Infographic)

One thing you can say with complete certainty about life is that it’s completely unpredictable. You never know what’s coming or what’s around the next corner. This time next year, you could be in a totally different job, or possibly even out of one. You could wind up married or starting a family. You might be renting a one-bedroom apartment or pulling together a down payment for a house. Or let’s face facts — you could be dead.
The point is that you have no way of knowing what your situation might be down the road, so you have no way of knowing what sorts of financial options you’ll need. Thankfully, there are plenty of choices for any life stage, whether you’re out making deliveries on your paper route or shaking hands with soon-to-be former colleagues at your retirement party.

The infographic below maps out some typical life stage banking products. And since risk is always a factor to some degree, whether it’s the risk that your investment could lose money or the risk that it won’t keep pace with inflation, each product has a corresponding risk meter. Also bear in mind as you look over the list that these are simple guidelines, and not every product is “locked in” to a specific age range.
If you have any questions about the information below, please feel free to contact a Bank5 Connect representative at 1-855-552-2655.

Every Step of the Way Infographic

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Please include attribution to Bank5Connect.com with this graphic.

Student Loan Forgiveness: Tax and Interest Consequences

Average student loan debt has reached more than $27,000, documents the Los Angeles Times. That can prevent graduates from buying those big-ticket items such as houses and new cars, which help grow the GDP. Therefore, there has been ongoing legislation to ease the burden on these debtors. Pending is the Student Loan Fairness Act. If that passes, the provisions could provide new terms and conditions for repaying this debt.

Right now debtors have a number of options for making their debt more manageable on a month-to-month basis. Essentially, those options fall into two categories. One is the Income-Based Repayment (IBR) program and the other is the Public Service Loan Forgiveness (PSFL) program. Both result in “loan forgiveness” after a set period. However, one – IBR – results in a tax liability for that debt forgiveness, just as happens with other kinds of debt forgiveness such as credit card debt. Those who select the IBR and the newest version of it – Pay as You Earn – should be aware of the tax consequences, both federal and state. In addition, because of the extended period for repayment from the original 10 years, overall interest paid out could total a higher amount than it would have under the standard terms and conditions.

With IBR, federal loan monthly repayments are adjusted according to the debtor’s income over a 25-year period. Therefore, only those with relatively low income would apply. Typical among applicants are those who attended law school, accumulated six-figure student loan debt, and may not have been able to get a position practicing law. For example, they might be working as journalists on Abovethelaw.com in Manhattan, making significantly less than the usual entry-level compensation of $160,000 for a Manhattan law firm. The new version of IBR – Pay as You Earn – can provide an even lower monthly payment over 20 years. After that, for both, there is loan forgiveness.

With PSFL, those employed in jobs classified as public service pay monthly the designated original amount due on loans. But after 10 years the balance is forgiven, without any tax liability. Those professions typically include teaching and child care. The eligibility rules are strict, such as documentation of full-time employment and on-time payment. For that reason, those considering this option should review the terms and conditions with Federal Student Aid, an office of the U.S. Department of Education.

Unless there is new legislation, after 25 or 20 years, those who opted for versions of IBR will face a tax liability, federal and perhaps also state. After 25 years, estimates the Institute for College Access & Success, the married engineer with one child and $60,000 in student loans could have a federal tax liability of $5,801 or the equivalent of $1,417 in 2013 dollars. The amount forgiven would be $23,202.

In addition, as those know who have had any kind of debt repayment extended over a period of time longer than the original terms and conditions, the amount of interest paid could be larger. That would make the overall cost of the loan larger. If the engineer had stuck with the original 10-year repayment plan, the total payout, including interest, would have been about $82,858. Under a 25-year schedule, the amount paid in would be about $124,935. That is, the repayment equaled the principal of $60,000, plus about $63,241 in interest.

Therefore, as with all decisions about how to repay debt, those with student loans have to consider if the standard terms and conditions would be a better financial choice. Instead of opting for other options, they would bring in more income and cut back on fixed expenses so that they could pay off the loan in 10 years.

Layoffs Are Possible: How to Prepare

The New York Times front-page June 2013 headline read “Even Pessimists Feel Optimistic Over Economy.” Great news.

However, in a turbulent global economy disrupted by technology, there will still be ongoing Reductions in Force (RIFs). RIFs is the 21st century term for that brutal experience of being laid off. According to recent Labor Department data, it takes about 36.5 weeks to find a new job. This blog contains seven financial tips for how to prepare if a layoff seems in the winds. Actually, given the economic volatility, employees should always anticipate the axe.

Reduced earnings, loss of a key contract, criticism by security analysts, management upheaval, need for a turnaround, and new technologies all could generate a RIF. Another factor can be achieving cost reductions by eliminating high-salaried older workers. PBS reports that it takes those over-55, on the average, about a year to find another job.

Tips

Ride it out

When layoffs are possible, anxiety surges. Often that brings out the worst in human beings across all levels of the organization. Escaping through quitting is not an option. That is, unless one has an independent source of income. At stake are any severance payouts, unemployment benefits, and access to COBRA or medical coverage. Some of that COBRA premium might be employer-paid for a few months after the layoff. In all situations, COBRA at group rates is available for 18 months after termination.

Figure out how to save the job or find another one in the organization

There’s an expression, “They managed to ‘save’ their jobs.” RIF lists are not cast in stone. Names are added and deleted continuously. Those skilled in organizational politics or how to present how vital their function is might be able to avoid a layoff. Also, while some departments are laying off, others are hiring.

Even before the hint of a RIF, it is wise to consider being hired in functions that are bringing in revenue. Those who don’t understand how to assess the manpower needs or understand the politics of an organization have to find mentors. Some report that they learned more about how to keep a job during a possible RIF than they had in all their previous years of employment.

Search for another job

Some daydream about collecting on the good-bye package like severance and then immediately landing a comparable job. That rarely happens. The exception is those in fields in demand, such as certain specialties in healthcare and technology. It makes good financial sense to search and then accept another job while one is still employed. That constitutes looking for another job from a position of strength. Unfortunately, being jobless imposes a stigma on most workers.

Don’t plan a time-out

Losing a job doesn’t mean a vacation. Those who decided to take a break after years of working found that to be a disadvantage. They got out of sync with the metabolism of the workplace. Skills atrophied. Knowledge bases got old. And the longer one is out of work, the less attractive one can be to employers.

Downsize spending

When possible, refrain from purchasing big-ticket items like vacations, a new car, or a bigger house. Apply that money to paying off debt. The biggest drain on fixed expenses after a layoff is making the minimum payments on credit card balances.

Investigate self-employment

Although not everyone is suited for running their own business or even being a “freelancer,” that is becoming a realistic option for the jobless. Their industry, such as law, might be downsizing. There is bias against hiring those over-55. Taking another job might entail compromises such as longer hours or relocation that don’t seem worth the amount of the particular paycheck.

Self-employment provides attractive tax write-offs

For example, every mile traveled on business is tax deductible. For a job with an extreme commute, none of the mileage is. Increasingly outplacement services, hired by organizations after a RIF, are offering briefings about self-employment. Also, there is a growing body of information on the web and through professional societies.

Research affordable health insurance

COBRA may be more expensive than other options for healthcare coverage. Trade associations frequently offer good deals for members. All that requires is joining. Also, there could be lower cost health maintenance organizations.

Freelancers

Those experimenting with self-employment might check out what is specifically available to small businesses and “freelancers.” For example, in New York, the Freelancers Union has established its own comprehensive healthcare facility for members. In the past small businesspeople have been scammed by some vendors promising comprehensive coverage for peanuts. Check out every company with others who are self-employed and appropriate state authorities.

Although layoffs can trigger emotional upheaval, they don’t have to plunge employees into financial ruin. Preparing for them has become as much a have-to in personal finance as saving for retirement.