A deceased loved one’s debt: Who pays what?

This was originally published on Monday, July 24, 2017, in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: My sister passed away unexpectedly. She left behind a few loans, including a mortgage, a new car loan and a student loan. Some of the loans she took out were done by her, but a few were co-signed by family members. She passed with good credit and was up to date on her loan payments. Our family would like to get a better understanding of what we are responsible for and what happens to the loans she had acquired by herself.

Answer: Condolences to you and your family. Losing a family member is certainly emotional. Once the ceremony of the funeral and burial are done, the stress of finalizing your loved one’s estate can be overwhelming.

Generally, creditors get paid first from the estate and assets left behind; the beneficiaries receive whatever remains. The person who is legally appointed to be the executor will use the assets to pay off the debt. This can be done by using money left in a bank account or even selling off property or stocks.

If there are not enough assets to pay off the debt, creditors may get part of what is left and the family members may not be responsible to pay off the debt.

Sometimes it is not that straightforward. The type of debt may also play a factor as to who is responsible for paying off the debt.

  • Mortgage. If the mortgage has a joint homeowner, he or she will inherit the house and the mortgage. Federal law prohibits lenders from forcing a joint homeowner to pay off the mortgage immediately after the death of the co-owner. If the mortgage doesn’t have a joint homeowner the executor can continue to pay the mortgage from the estate. If the estate doesn’t have enough money, the person(s) who inherit the house can take over the mortgage payments.
  • Home equity loan. If someone inherits the house, they will also inherit the loan. A lender can request the inheritor to repay the home equity loan immediately. If the inheritor doesn’t have the money, the lender may require selling the house. Lenders do have the option to work with the inheritor to take over payments.
  • Credit cards. If the credit card has a joint account holder, he or she will be responsible for the unpaid bills. Authorized users listed on the account are not responsible to pay off the remaining balance. If the estate doesn’t have enough to pay off the credit card balance, the credit card companies absorb the debt. Credit card debt, unlike a car loan or mortgage, is considered an unsecured loan because the loan is issued on the borrower’s creditworthiness.
  • Car loan. If the car loan has a co-signer, the co-signer is responsible for continuing the payments or paying off the loan. If the deceased is the sole owner of the loan, the executor can pay the loan from the estate. If the payments stop, the lender can repossess the car. If the estate can’t pay off the loan, the inheritor of the car can continue making payments.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

Avoid some common financial mistakes

This was originally published on Monday, December 19 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

It goes without saying that money is of the utmost importance and, if not dealt with in the right way, could land you in a bad financial situation. What you are today and where you want to be tomorrow are the results of all the financial choices you have made in the past.

The good news is that you can prevent most of these mistakes if you are aware of them. Here are some more common mistakes made:

  • Your mortgage length. The most common mortgage term is 30 years. Many new home owners settle for the 30-year mortgage because the upfront costs are lower. But take some time and really look at your mortgage contract. If you purchased your house with a 30-year mortgage for $250,000 at 8 percent, the total amount you will be paying is $660,000. That is a difference of $410,000 that goes directly to your lender. If you can refinance your home to take advantage of low interest rates, do so, and take a 15-year mortgage instead. If you can’t afford to make higher payments with the 15-year mortgage, try paying half your mortgage every two weeks. At the end of the year you will have made 13 payments instead of 12. By doing this, you can pay your mortgage five to 10 years earlier and save $100,000 or more, depending on your interest rate.
  • Automatic payments. Let’s face it, life is hectic enough. You don’t need to run to the bank to deposit paychecks or run errands at lunch time to pay bills. By automating your finances, you can save time, fuel and the expenses of late fees if you forget to pay your bill on time. Create an automatic payroll deduction with your employer to your checking or savings account so that you ensure you are paid first. Financial institutions make it easy to pay bills or credit cards on line with their online bill-paying services.
  • Not monitoring your credit score/report. Your credit score and report are important because these two items essentially tell potential lenders how well you handle your money. If you are purchasing a home, your credit rating is considered in determining your loan interest rate, and the difference between a poor credit rating and a good rating can be enormous. With a good score, you are offered lower interest rates, which in the end can save you thousands of dollars and sometimes even hundreds of thousands of dollars. Future employers can also look at your score and use it to determine how dependable you are. To keep a good score, pay your credit cards and other debts on time. A good rule of thumb is to use 10 percent to 30 percent of the credit available to you. Check your credit report and score for free three times a year and dispute any odd accounts or mistakes on your report.
  • Not having a will or trust. We never want to think about passing, but not having a will or trust can cause some serious financial issues for your loved ones. Even though you feel that you do not have enough assets or money to pass on, what you do have should stay with your family. A will or trust can also plan for the care of your children upon your death. If a guardian is not named, the state will have to decide who will provide care for your children. Protect your family and your estate by having a will or a trust.
  • Life insurance. Life insurance can assist your family members in covering the cost of your funeral expenses and pay other bills long after you are gone. Not only should you be covered, so should every member of your family. Funerals are expensive no matter how old you are. Life insurance can also help pay for medical bills that may be left behind.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com

Time to assess your financial goals

This was originally published on Monday, November 21 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

With just a little over a month left in the year, you may be realizing that you haven’t quite met your financial goals. With time rushing by and the busy holidays upon us, take some time to think about ways to improve your personal financial situation.

  • Family report card. Take some time to talk to your family about where you stand financially. Be open and honest. Everyone plays a part in earning and spending the money. Kids are quite receptive and often like to be included in something so important. The family must work as a unit so that they can achieve the goals set for them. Get everyone involved in saving. Make it into a game; the family member that saves the most wins.
  • Prepay. If you have the opportunity to prepay your bills — property taxes, medical bills or college tuition — do so. It can mean deductions or discounts. Some may even reduce your taxable income.
  • Emergency fund. How much do you have in your emergency fund? Do you have an emergency fund? Many experts say that a healthy emergency fund consists of at least three months’ worth of expenditures. If you don’t have one, start one. Make it a New Year’s resolution. The fund will be helpful when your car breaks down, or if you lose your job.
  • Add a little to your mortgage. Call your financial institution and ask if there’s a penalty in paying off your mortgage early. If you have a little left over after every pay period and you are already paying down your debt and putting money aside for savings, you may want to consider adding to your mortgage payment. If you have 20 years and a $150,000 balance remaining on your mortgage, and a fixed rate of 6 percent, you will pay about $107,915 in interest over the next 20 years. When you add an extra $100 payment each month, you shorten the repayment timetable by almost three years and will save more than $18,000 in interest payments.
  • Harvest capital losses to balance gains. When you review your year-end portfolio, consider taking some of your capital losses to cancel out your capital gains. Not only will it save you money on capital gains taxes, but it will give you the opportunity to remove some of the lower performing stocks, reset your asset allocation and reinvest in areas you think may have more potential for gain.
  • Pay more than the minimum. A minimum payment on a credit card adjusts every month. The minimum payment is a percentage based off your current balance. If you do make charge purchases to the card and your APR doesn’t change, then your balance and your minimum should shrink with every payment.  Consider using a fixed payment to pay down your balance more quickly. Do not use the card for six months to a year. Add an extra $20 to $50 above the minimum payment – you will be surprised how much your balance is reduced. Automatic transfers will eliminate a bill payment chore, and the temptation to fall back to minimum payments.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog atwww.moneymattersguam.wordpress.com

Debt from the deceased can be complex

This was originally published on Monday, May 9 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: My father is terminally ill and I am in the process of getting his affairs in order. He has an updated will and I have confirmed that my mother is named as his beneficiary for his life insurance and retirement plan. My main concern is his debt. He took out a large loan several years to help with his medical treatments. He is not behind on his payments but I am curious to what happens to the debt once he passes. Could you help me understand how debt is paid off once the lean holder is deceased?

A: I am so sorry to hear about your father’s illness. As a child it is hard having to switch roles and become the caretaker for our parents. Unfortunately, when someone dies, their debt does not disappear. The rules to creditors recouping their money is complex and often vary from state to state. Of course, it also depends on the type of loan and if there are others who share the responsibility.

Family members typically are not obligated to pay off the debt of a deceased family member directly from their assets. The Fair Debt Collection Practices Act (FDCPA) protects family members from unfair, deceptive, or abusive practices used to collect a debt.

Who is responsible? Take a look at who signed for the debt. If it is a joint debt, then two or more people are responsible for the full debt. The names of those responsible will appear on the promissory note, loan or credit agreement.

Usually there is a clause in the contract that if something should happen to one of the responsible parties and they are unable to pay their portion then the surviving debtor(s) are responsible to pay off the full amount.

If only one person owns the debt, then that person is responsible for that debt. If the estate, the total net worth of an individual that includes land, possessions, cash, and other assets, of the deceased doesn’t have enough money to cover the debt, the debt may go unpaid. If the estate has money, then the assets from the estate will be used to pay off the debt.

Type of debt

Depending on what type of debt the deceased leaves behind will also determine if the debt will be repaid.

  • Credit card. If the credit card is joint with someone else or has a cosigner(s) then the cosigner(s) are responsible for paying off the debt. Otherwise depending on the amount left the credit card company may pursue collecting what is due.
  • Mortgage. If you are inheriting a house with a mortgage you will inherit the debt as well. If you cannot make the payments, you may have to sell the home. If you are having trouble paying the mortgage, it could affect your credit score if your name is on the note secured by the mortgage.
  • Medical. Medical expenses are usually on top of the priority list to of debts to pay.
  • Taxes. If your loved one passed and left unpaid property or income taxes, the estate will be responsible to pay them. They too can put a lien on assets till the debt is paid off. The deceased will be responsible to pay any income tax on income earned during the year of their death.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo .com and read past columns at the Money Matters blog at www.moneymattersguam .wordpress.com.

Selecting a life insurance beneficiary is important preparation

This was originally published on Monday, April 4 ,2016 in the Pacific Daily News.  Click here to subscribe to the PDN.

Question: I am sixty years old and a widower. I have a mortgage which I am solely responsible for and two adult children. I have a life insurance plan through my employer. If I were to pass, I want my son to inherit my house. I was wondering if it would be possible for a portion of my life insurance to go to my two children and to my mortgage bank to ensure that the payments are made?

Answer: I commend you for taking this matter into consideration before you pass. No one likes thinking about passing on but it is very important to be prepared when it happens. Unfortunately, many families go through some bitter times trying to decide how to carry out their loved one’s final wishes. Sometimes this can cause a rift that cannot be mended. A lot of these disputes can be avoided if specific instructions were left behind. It is important that you understand your insurance policy and the parameters within that policy. When choosing your beneficiary there are several things to consider.

The proper beneficiary — Selecting a beneficiary is a very personal decision. Some people want to ensure that their loved ones have enough money to cover funeral expenses or they may want to ensure that their family can survive after they pass. Yet, some view it as a financial transaction. When choosing a beneficiary ask yourself a few questions. Who will be bearing the costs of your funeral? Who counts on you financially? Take time when choosing your beneficiary. Here are some choices to consider:

  • Family – For most, this is the top of the priority list, especially for those who are financially dependent on you. Family members could include your spouse or partner, children, parents, or siblings. You can choose multiple family members as your beneficiaries. Per stripes means you can designate branches of a family or lineage and the proceeds are divided equally among the beneficiary and/or their surviving children. Let’s say that you named your son and daughter as your beneficiaries and they receive 50 percent each of the proceeds. If your son passes before you, his children will split his 50 percent equally and your daughter still receives her 50 percent. Using the same scenario, if your son had two children, then the proceeds will be divided equally between your son’s children and your daughter. The proceeds will be divided into thirds.
  • Legal guardian – If you are appointing a minor (under 18 years of age) or someone who is not mentally or physically able to care for themselves as your beneficiary, you may be required to name a legal guardian. You do not have to choose the appointed legal guardian; you can request to appoint a guardian of your choice.
  • Estate – You may choose your estate to be your beneficiary. You must have your last will and testament drawn and the executor of your will receive the proceeds from your life insurance policy. The executor will have to carry out the terms of your will. When you name your estate as the beneficiary, it will be the sole beneficiary of your life insurance policy. Talk with your accountant to discuss the taxes associated with your estate becoming your beneficiary.
  • Trust – A trust is a legal agreement that allows a third party, or trustee, to hold assets on behalf of the beneficiary or beneficiaries. You can make the trust your life insurance beneficiary. You can specify the terms of a trust controlling when and to whom distributions may be made. A trust can also protect your estate from your heir’s creditors or from beneficiaries who may not be adept at money management.
  • Charity – You can name a charity to receive some or all of your proceeds.
  • Mortgage – You can make your mortgage institution a beneficiary of your life insurance policy. Be very specific about the amount and account number etc. when doing so.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.

How do I reduce my monthly expenses during retirement?

This was originally published on Monday, February 22, 2016, in the Pacific Daily News.  Click here to subscribe to the PDN.

Q: I am about to retire in a few years. I have been contributing to my 401(k) and plan on withdrawing Social Security a few years after I retire so I can get the maximum payment from my Social Security. I know retirement is going to be a big change. Do you have any tips on reducing my monthly expenses during retirement?

I commend you. You sound like you are prepared for retirement. Numerous seniors are finding ways to downsize and make more with less income. Many reduce their bills and increase their spending power. These tips may make a big impact on your retirement budget:

Mortgage. If you are within a few years of paying off your mortgage you may want to consider doing so before you retire, especially if your interest rate is higher than the return on your retirement fund. In other words, would it be more beneficial to use that money to pay off your mortgage or to add it to your retirement fund? Which will give you the biggest return?

Downsizing your home. If you own your home you may want to consider downsizing to a smaller home or even to an apartment or condominium. It will be easier to take care of if you have children who are grown and independent. Make sure that the cost of acquiring a new home fits within your budget. If you are going to be purchasing another home, you may have a new mortgage. On the other hand, you can rent your home for extra income or sell it to help purchase the smaller home or add to your nest egg.

Cost of Living. Guam has a high cost of living since almost everything has to be shipped. You may want to consider moving to a state or abroad to where the cost of living is lower. Lower prices on the taxes, food, electricity and other services can help stretch your retirement budget.

Sell a vehicle. If you and your spouse had separate cars for the past years and you are both entering retirement, you may be able to utilize just one car. It would eliminate maintenance and insurance costs and the extra fuel budget.

Retirement penalties. Be sure you understand when you can start withdrawing from your retirement fund. If you withdraw too early or too late, you may be penalized with a hefty fee. As you know, there is a penalty if you withdraw Social Security too soon and you don’t get the full amount. There is also a late enrollment penalty if you postpone signing up for Medicare Parts B and D.

Health care. As we get older, medical care will get more expensive as our bodies start to age. Since we can’t really budget or predict the cost, be sure you have a little wiggle room in your budget. You may want to purchase additional insurance to help cover some of the costs that Medicare doesn’t cover. Ask your physician if there is a generic brand equivalent to medications you are currently taking.

Discounts. There are some perks to maturing. Many stores, restaurants, movie theaters and other service-driven organizations offer a senior discount. Many may not be advertised. It won’t hurt to ask; the worse they can say is “no.”

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.

Successful habits for creating a retirement savings account

This was originally published on Monday, February 9, 2016, in the Pacific Daily News.  Click here to subscribe to the PDN.

Retirement, whether it is near or far, should be a priority for all of us. Most people believe that you have to make a lot of money to save for retirement. You don’t have to make a million dollars to save a million dollars. What you do need are habits that create successful retirement savings.

Save early. By starting early you gain some advantages. The money you save grows through compound interest. Compound interest multiplies your savings as time passes. The longer you grow your investment the more interest it earns. By starting early you also learn more about the habit of saving.

If you did not start saving at an early age, you are not doomed. Start as soon as you can. You may have to put a little more aside but having a retirement fund is certainly better than not having one at all.

Minimize debt. This can be the hardest habit to develop. Sometimes we can’t avoid being in debt. The money could be used to purchase a car, to pay for college or to buy a home. But there are some debts that you can avoid such as credit card debt. For everyday purchases use cash not your credit card. If you do use your credit card, pay it off as soon as possible. Pay more than the minimum amount that the credit card company asks for. An extra $20 to $50 can make a huge difference when it comes to paying off a credit card debt.

Take a look at your debt-to-income ratio. Add up all your monthly debt payments and divide it by how much income you bring home in a month. Target a maximum debt to income ratio of 35 percent.

Mortgage. Buying a home is probably going to be the largest purchase you will ever make. By putting down a larger down payment than what is required you will reduce the amount you owe.

There is some debate about going into retirement with a mortgage versus no mortgage. If you try to pay off your mortgage early, you are diverting some of the money you can be investing into your retirement account. The more you put into the account, the more compound interest you will earn. But if you pay off your mortgage before you retire, you will not have to make that monthly payment and that could ease your mind when you are living on a fixed income. Do the math in terms of the investment return of your retirement fund versus the mortgage cost then make a decision when it is best to pay off your mortgage.

Automatic deduction. Make the contributions to your retirement fund automatically. Have the payments come directly out of your paycheck. If you do not have to touch the money to make the payments you will not be enticed to use it elsewhere.

Take advantage of your retirement fund. If possible contribute the maximum amount to your retirement fund. This is especially true for those who are starting a little later in life. Many people think that they can’t afford the maximum payment. If you have the amount automatically deducted from your account you really won’t miss it. You will learn to live on a little less.

If you honestly can’t make the maximum contribution, at least contribute the maximum your employer will match. Your employer’s contribution is free money that you should not be passing up.

Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at moneymattersguam@yahoo.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.