Debt judgment puts inheritance at risk

To Her Credit columnist Sally Herigstad
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

Dear To Her Credit,
I got behind on some credit card debt, and the card company placed a judgment against me at the courthouse. I expect to inherit money or a house from my parents in the future. Will it automatically go to pay the judgment?   -- Sandra

Answer for the expert

Dear Sandra,
Why shouldn't you use at least a portion of your inheritance to pay your debts? I understand that paying off old debts with money your parents leave you is a real downer. However, I don't understand people who say they wouldn't want an inheritance to "just go to pay debt" -- as if that would some kind of travesty.

If you owe money on a credit card account, that means you bought things. No one is passing judgment on why you spent more than you could pay off every month. However, the fact remains that you received goods or services every time you used your card. If you expect to receive an inheritance, you spent your inheritance before you received it.

I recommend that you pay off or otherwise resolve this debt as soon as possible, preferably before you receive an inheritance. It's an emotional and financial burden, and it's not getting any lighter.

Your credit card company can't take or in any way attach itself to an expected inheritance, of course. There's no way for anyone to predict when, or even if, you will get a future inheritance.

In the meantime, it's important for you to know that there is no automatic system to hand your inheritance over to your creditor when you get it. Your creditor probably won't even know when you get it.

That doesn't give you any guarantee that your debtors won't discover your newfound assets should you receive an inheritance, however. Instead of leaving it to chance, you should plan ahead so you can stay in control of your inheritance and pay off debts on your own terms. Jeremy Heck, consumer law attorney in Columbus, Ohio, says, "If a judgment has been rendered against you and you are expecting to inherit an asset, you should plan properly because the asset is at risk once you actually inherit it. Once the gift comes into your possession, the creditor is able to go through normal garnishment procedures, including attaching bank accounts, placing a lien on real property, foreclosure, and so on."

If you received the inheritance before a creditor forces you to take a debtor's exam, you'll have to tell them about it. According to Heck, a debtor's exam is basically a deposition under oath, during which the creditor asks about all your assets. If you try to hide assets during a debtor's exam, you will have committed perjury.

Some types of inheritances, such as certain kinds of life insurance policies and beneficiary plans, may be protected from garnishment. On the other hand, Heck says, "Some vested future interests may be attached prior to the death of the benefactor." (A vested future interest is a right to a future benefit that cannot be taken away from you.)

Your debt is not getting any smaller while it's parked down there at the courthouse. If you don't want to have your inheritance "just" go to pay your debt, the best thing you can do is get rid of the debt before you get your inheritance. Try to increase your earning power, reduce your living expenses and work as hard as you can to get that debt paid off. If the debt is more than you have any hope of paying off -- generally more than you make in a year -- you may want to consider negotiating a debt settlement (paying less than you owe) or filing for bankruptcy.

See related: Can collectors come after your inheritance?, Is inheritance at risk with bankruptcy filing?

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Updated: 11-22-2017