Can Someone Else Pay Off My Debt?

Is It Possible for Someone Else to Pay Off My Debt?

Yes, someone else can pay off your debt, but there are considerations you must make beforehand to ensure there are no unintended consequences.

Creditor Rules

Most financial institutions allow other people to pay off your debt, though there may be stipulations. For example, if you're behind on your mortgage payments, your lender may reject a partial payment that doesn't bring your account current. Also, some creditors may wish to verify the source of the payment to ensure the funds aren't coming from an illegal source.

Terms May Change

If someone wants to take over your account, your lender may wish to change your loan terms. For example, if a relative wants to assume your mortgage, your lender may allow it if they have good credit, but they may change the loan's interest rate.

Tax Implications

If someone else pays off your mortgage or another significant debt, it could be considered a gift under tax laws. More information on the tax implications of having someone pay your debt follows below.

Relationship Impact

Accepting financial help from a friend or family member can be risky, especially if the person paying your debt expects repayment or if they use the gift as leverage in future disagreements. Will you feel guilty if they see you spending money on a non-essential item? Many potential problems can be worked out by having honest conversations beforehand to build trust and set expectations. Formalize your agreement in writing with a loan contract, or promissory note, that outlines any expectations for repayment. Include future dates for minimum payments and when the debt will be repaid in full.

4 Ways Someone Can Pay Off Your Debt

Count yourself as lucky if you have a friend or relative with the resources and generosity to help pay off your debt. Here are four ways they can facilitate the debt payoff:

• Give you a cash gift. Perhaps the easiest way is for your donor to give the money for your debt to you directly. However, it may not be practical if you're working with a large amount of money. In that case, your donor could transfer money directly into your account, send the money via a mobile payment app or issue you a check or money order.
• Pay your creditor directly. Your donor can make a direct payment in a number of ways, but they'll need your account number to do so. They can visit your creditor's website or call their customer service department and use their account information to make a payment. Alternatively, they can mail a check to your creditor and enter your name and account number on the check, or even visit a physical branch office to make a payment.
• Link their bank account to your debt account. This option could make sense if your donor wishes to make monthly payments on your debt.
• Use their credit. Your donor may want to pay off your high-interest credit cards by refinancing your debt with a low-interest debt consolidation loan or a 0% intro APR balance transfer credit card in their name. They'll generally need good to excellent credit to qualify, but reducing the interest rate on the debt could save them money in the long run. In some cases, the creditor may require your donor to add your name as an authorized user or open a joint account with you in order to transfer the balance of your debt to the new account.

Will I Be Taxed if Someone Pays Off My Debt?

When someone pays off your debt, your tax liability depends on how you receive the payment. Generally, you don't have to pay taxes on any money you receive as a gift. However, the giver may have to report the payment if the amount exceeds the IRS annual gift tax exemption of $17,000 for 2023. Fortunately, a $12.92 million lifetime gift tax exemption exists, so a person can make substantial gifts under this exemption.

On the other hand, you may have to pay a tax if your employer pays off your student loan or other debt because the payment is considered taxable income. As such, your employer can include the payments on your W-2, and they are subject to payroll tax.

Eliminating Debt Can Boost Your Credit Score

In addition to the financial relief you receive when someone pays off your debt, your credit score may also get a boost. That's because the amount of available credit you use accounts for up to 30% of your FICO^® Score^☉ . Generally, the lower your credit utilization ratio, the better it is for your credit score.

With your debt gone, you can build your credit by practicing good financial habits. Many financial experts advise avoiding debt on non-essential items unless you get a permanent asset, like a house, in return. Paying your bills on time is the best way to improve your credit, as your payment history makes up 35% of your credit score. Keep track of your credit by checking your credit score and credit report for free with Experian, or consider monitoring your credit for a more hands-off approach.