Credit card debt
Credit card debt is incredibly expensive, and yet in 2024, 68% of retirees with debt reported having credit card debt outstanding, according to a survey by the Employee Benefit Research Institute. The average interest rate was over 20% in November.
When it comes to credit card debt, your great aunt may want to budget in at least the minimum monthly payment to avoid going to collection. When she passes away, this debt will be paid out of her estate.
While debt collectors wouldn’t be able to garnish her Social Security benefit outright, they could sue her and get a court order for the amount owed.
"A creditor can get a court order to seize non-Social Security money from your bank account. The bank is required to protect two months’ worth of Social Security payments in your account if you get it by direct deposit, but the creditor can go after anything more than that," explains Debt.org. "A court judgment against you for an unpaid debt can put a lien on your home or other property. In most states, the property can’t be sold until the lien is paid."
While it’s difficult for them to garnish a pension, they could get some of that income through a court order if it is not protected by the Employee Retirement Income Security Act of 1974 (ERISA).
“Most employer pensions meet ERISA’s requirements while some individual pensions, like IRAs and Roth IRAs, do not. These pensions could be at risk once they are deposited into a bank account,” said Bruce McClary, vice president of communications for the National Foundation for Credit Counseling. “In addition to ERISA’s protections, each state also sets limits on the amount that’s protected from creditors.”
While she might not be worried about her credit score at age 82, if a collection agency comes after her, it could impact her quality of life in retirement through persistent collection calls or even legal action.
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Learn MoreTimeshare payments
Defaulting on timeshare loan payments or maintenance fees can lead to late fees and penalties, damage to your credit score and collection attempts or even foreclosure.
Aside from continuing to ignore the issue, other options for someone who can no longer afford their timeshare include refinancing, debt resettlement (for those who can prove financial hardship) or, as a last resort, declaring bankruptcy.
If your great aunt can’t afford her timeshare loan payments anymore, she could potentially negotiate a “hardship plan” with the timeshare company, such as adjusting their payments or exiting the contract.
A timeshare loan isn’t a mortgage; it isn’t considered a secured loan (which is backed by collateral, the way a mortgage is secured by a property). Rather, a timeshare loan is typically unsecured, so transferring ownership or selling may not be an option if payments are in default. However, some timeshare companies offer buyback programs.
What you can do now
If you start paying off your great-aunt’s debt, it could be considered a “gift” under tax laws. But you’ll have to give serious consideration as to whether that makes sense for you. An injection of cash could help in an emergency situation, but paying off her debt could put you in debt or prevent you from saving for your own retirement. You also may pay off the debt only to have another party be the beneficiary of her estate, so benefitting that person rather than your aunt. Perhaps this may be avoided by structuring any assistance as a loan, but you should contact a lawyer for advice on this.
It is likely worth consulting an elder law attorney, financial adviser or debt counsellor, since everyone’s situation is different. However, you — perhaps with the help of a debt counsellor — could help your great aunt set up a realistic budget that includes at least the minimum monthly payment on her credit cards. You could also act as her advocate when dealing with the timeshare company.
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Learn moreWhat can heirs do if they inherit debt?
When someone passes away, the estate (which refers to the person’s money and property) pays off any debt first, and any remaining funds are then distributed to beneficiaries as outlined in the will. If the estate can’t pay, then the debt is typically written off by creditors. Beneficiaries aren’t personally responsible for that debt — except in a few instances.
Credit card debt doesn’t just disappear after someone passes away; it gets passed on to the estate. Secured debt is paid to creditors first, followed by unsecured debt (like credit card debt). So, if there’s a lot of debt to be paid off, there could be little left (if anything at all) for beneficiaries — who are at the very back of the line. If the estate can’t pay off the debt, there are only a few instances where a beneficiary would assume the debt: say, if you’re a joint cardholder, if you’re a cosigner for a card or if you’re subject to community property laws.
In community property states, debts acquired during marriage are the responsibility of the couple (even if the debt is only in one spouse’s name). Those states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Timeshare loans are typically unsecured (unless you’re using a home equity loan to finance the purchase). If your great aunt is unable to extricate herself from the timeshare while she’s still alive, the debt would fall to the estate. That’s because timeshare contracts typically have a “perpetuity clause,” which basically means you own the timeshare for life and, when you pass away, it becomes part of your estate.
Timeshares are complicated; it’s well worth consulting an estate lawyer over your options if you’re about to inherit a timeshare (whether you want it or not).
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