The Frugal Life
October 18, 2001

Inherited Debts? --by Gary Foreman

Dear Dollar Stretcher,
I've heard that when parents are in debt and they die the debts are left to the children to pay off. Is this true? My parents had gotten a divorce a few years ago. My mom is doing well because she is a saving queen. My dad had remarried two years ago. His wife does not work but loves to spend money. So now they have a $20,000 debt. If my father dies, his wife is responsible for the debt, right? What happens after she dies and there is still that debt? Also, what happens if she dies first, and then my father--who gets the debt?
Judy

Judy asks a question that comes up often. Can someone die and 'leave' their debts to you? The answer is no. Parents can't leave their debts to you. In fact, they can't even leave their debts to their spouse.

Typically a will controls financial affairs after a person's death. A will distributes assets, not debts. But, before any money can be distributed to heirs, all the debts must be paid. So enough assets are sold to pay for any debts that remain. Only after the debts are paid will the remaining assets be distributed among the beneficiaries of the will.

The key point to remember is that you are only responsible for debts that you contractually created. There are certain circumstances that would put Judy at risk for her dad's debt. But she would have had to do something to cause that responsibility.

Suppose that Judy's dad asked her to co-sign a loan. Signing would make her responsible for the debt. Not only if her Dad died, but also if he failed to make a payment. But she shouldn't be surprised. When you 'co-sign' a loan, you do just that. You put your signature on the loan application.

A similar situation occurs with a joint credit card. A joint account allows anyone named on the account to use it to create a debt. But it also means that everyone listed on the account is responsible for the entire debt that's created.

Suppose Judy had a joint card with her dad. And he was the only one using the card. Any debts he left at death would be Judy's. But once again, it should be no surprise to Judy. She signed the joint application for the account. And it's her responsibility to be aware of whether it's being paid off or not.

It wouldn't be unusual for Judy's dad and step-mother to have a joint account. In that case the survivor would be responsible for any balances on the account.

Joint credit card accounts often create problems in a divorce. Often a couple has a joint account before the divorce. The credit card company isn't going to split the bill just because a couple throws in the towel. As far as they're concerned, both the ex-husband and wife are responsible for the entire amount of the bill until it's paid. And while a court can instruct one party to pay, sometimes it still doesn't happen.

Another way that people end up paying someone else's debt is when you let someone use your credit card. Again, it should be no surprise when the bill comes in.

So what happens to the debts of someone who dies? The credit card company will first try to collect from the estate. As mentioned earlier, assets will be sold to pay the bills. Then, if the account was a joint account, any survivors will be left holding the bag. If the debt belonged solely to the deceased, then the credit card company will end up eating the debt if there aren't enough assets to cover it.

But Judy isn't completely off the hook. She might still want to advise her dad to control his spending. As her father and step-mother get older they could have trouble keeping up with the minimum payments. And, once they fall behind things will get tough. Credit card companies are quick to bump up interest rates when you miss a payment.

And that would be trouble. Judy's father will probably be living on a fixed income during retirement. So the payment that was a struggle at 12% interest becomes impossible when the interest rate goes to 20%. And unless they have some assets that can be sold to reduce the debt, the minimum payments will dominate their finances.

And that's where Judy comes in. I don't know her relationship to her father, but it would be awfully hard to watch a parent struggle to put food on the table. Even if they caused the problem by foolish past spending.

It actually would be interesting if parents could 'leave' their debts to someone after they die. I suspect that many children would treat their parents much better if that were the case. Instead of parents threatening to cut a child out of their will, parents could run up large debts and threaten to put a child into their will! Never mind! It's a good thing that the law doesn't read that way. Somehow I don't think that it would be good for family relations.

Gary Foreman is a former Certified Financial Planner who currently edits The Dollar Stretcher website.

Lessons from My Journey to Debt FREEDOM --byGreg Moore, CFISL                       

How to Beat Recessions  

First the stock market starts heading south...  

Then your company starts charging for coffee...  

Next thing you know, your neighbor is out of work...  

Financial talking-heads start whispering oxymoronic phrases like"negative growth".  

Finally, the politicos start trying to find someone to blame for this lousy economic picture.  

And the dreaded "R" word starts making headlines.  

If you don't know, "Recession", is formally defined as two or more consecutive quarters of decline in the Gross Domestic Product.

And Gross Domestic Product is the total market value of all final goods and services produced in a country in a given year.  

If you take the total consumer, government, and investment spending for a year, add the value of exports and subtract the value of imports, you have Gross Domestic Product.  

Two consecutive quarterly declines in this total is a Recession.  

From the above clues, you knew something was up, of course, even if you couldn't formally define it.  

For the individual, as opposed to countries, two fears accompany recessions:      

1. Fear of "negative wealth growth"  :-)        
2. Fear of "negative employment growth"  

To beat a recession, you have to beat these fears.  

For clever investors, even recessions afford opportunities for positive wealth growth.  

But for the most part, we're not clever investors. We're just following the plan -- 401K, IRA, 403B, Monthly Savings -- that's been laid out for us.  

And lo and behold, we're scared when the "R" word shows up.  

However, even you can grow your wealth in a positive direction in both good times and bad.  

How?  

By completely paying off your debts.  

With each debt you pay off, you grow your wealth. This is because you get to keep wealth that was formerly going to interest.  

In fact, if you pay off an 18% debt card (after all, that's what a credit card really is, right?) you earn a guaranteed 18% -- AFTER TAX!  

Do you have a mortgage?  

How much wealth do you have if you have a $100,000 house with a $100,000 mortgage?  

Zero?  

Well, that's a good answer.  

Actually, you have "negative wealth".  

This is because there's a huge 30-yr long tapeworm of interest guaranteed to consume your future wealth.  

So, as you pay off your mortgage, you shrink the tapeworm AND you increase your ownership -- a.k.a. equity -- in your home.  

Both of these build wealth and eliminate your first fear.  

The second fear of "negative employment growth" can also be eliminated using this same strategy.  

The reason this fear is real is because you need employment to pay for your cost of living.  

What if you had NO debts?  

Would your cost of living be cheaper?  

Would you be able to save enough income to pay for these reduced cost of living expenses for 6 months? 9 months? A year?  

In Jan 2001, on average, it required 12.6 weeks of effort to find work.  In October of 2001, this number is most likely higher. But even if it doubled, which it didn't, that's 25  weeks... a little over 6 months. 

Pay off your debts and grow your wealth. 

Then save as many months of living expenses as required for you to feel NO FEAR of negative employment growth.  

Two fears eliminated.  

Recessions beaten.  

Greg Moore is the author of the debt freedom course,
"DebtIntoWealth -- Lessons from My Journey to Debt Freedom".
FREE Lesson 1 of this course.

The Question of the Day -- By Doris S. Dobkins

This week, I've received emails from several readers who have recently been laid off from their jobs. Some were surprised and some weren't.

This article revolves around a simple question, a question I've been asking myself every day for the past couple of weeks.

The question makes me think! The question gives me a better perspective for my frugality.

The question is, "What would life be like for you if you lost your job tomorrow?" If your paychecks would stop immediately, what would you do?

How long could you last on savings?
Would you end up going into major debt?

If you are like most people with credit card debt, a car payment a mortgage, and living from paycheck to paycheck, you'd probably panic. If you had some money in savings, it could tie you over for a while but for how long?

I want you to think about this question for a while. If you have no debt, no car payment, no mortgage and no credit card balances, how much money would you need each month to live on? Now if you were to lose your job, how would you feel? You could probably get a minimum wage job anywhere and get by with no problem, right?

What is that worth to you? Is it worth getting out of debt for? Is it worth it for you to have financial freedom and peace of mind that a debt-free lifestyle can give? If so, establish a debt elimination plan for yourself, follow it and achieve success.

I know there are people who want to keep their mortgage and/or invest their extra payments for a higher return in the stock market. I know that many people are hanging on to their mortgage because they think it is their last tax deduction. But what about the peace of mind that comes from knowing that what's yours is yours and that you are debt free?

For me, that's the only way to be. I'm working on my plan, how about you?

About The Author:
Doris Dobkins is the Money Saving Expert Author of "Financial Freedom A-Z Home Study Course" and publisher of the free weekly ezine $mart Money New$. You can subscribe to $mart Money New$.  Sign up at her website

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Readers Tips

I just have to respond to the lady who is saving money by using Ziploc baggies to store breastmilk and use in her child's bottle.  She needs to know that you should not use just any bag in a child's bottle.  First of all, the bags made for use in baby bottles are specially sterilized.  Milk, even human milk once it's out of your body, is a perfect breeding ground for bacteria, and should NEVER be put into anything that is not sterile.  I don't know about regular Ziploc bags, but I wouldn't chance contaminating my child's milk.  Furthermore, if new or expectant mothers are concerned about saving money regarding their infants' care, breastfeeding for at least the entire first year (as long as they would be fed formula) is the cheapest, easiest baby care around.  That's not taking into account all the other benefits -- immunities, bonding, etc.  So kudos to the new Mom who is breastfeeding and pumping her milk, but please warn her that Ziploc bags may not be sterile enough.  And congratulations on your own little angel!  My own daughter is 2 1/2, and she just keeps getting better.  Thanks for the great newsletter