By Tim MaxwellCan Someone Else Pay Off My Debt?
Quick Answer
A close friend or family member can pay off your debt, but credit rules, tax implications and other considerations must be made. Your donor can pay down or eliminate your debt by making direct payments to you, your creditors or other methods.
If you're struggling to pay down credit card balances, loans and other debts, you may wish to get financial help from a close friend or family member. As far as your lender is concerned, you're the one responsible for making payments according to your lending agreement. That said, if a generous relative or friend is offering to relieve the strain on your finances by paying off your debt, there aren't usually any rules preventing them from doing so.
While getting monetary help from someone you know can often be awkward, sometimes it can be your best solution to avoid a financial catastrophe. There are several ways someone else can help you pay off your debt. Here's what you should know.
Is It Possible for Someone Else to Pay Off My Debt?
Yes, generally speaking, it's possible for someone else to pay off your debt. That said, 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. Generally speaking, you won't be responsible for paying any taxes if a loved one, such as a relative or friend, pays off your debt. It is possible, however, that the person gifting you the money (in the form of direct debt payments, or as cash given directly to you) might owe taxes on the gift. Whether or not they'll owe taxes depends on the amount they give you.
On the other hand, you could end up owing taxes if your employer pays off your debt—for instance, if your employer offers student loan repayment as a benefit. In that case, the amount your employer repays may count as income on your tax return, and you may owe taxes on it.
Learn more: What Is the Gift Tax?
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 nonessential item?
Many potential problems can be worked out by having honest conversations beforehand to build trust and set expectations.
Tip: When receiving funds from a loved one, whether in the form of a debt repayment or cash, it's a good idea to create a formalized agreement in writing. Consider coming up with a loan contract, or promissory note, that outlines any expectations for repayment. Be sure that both of you consent to the terms, and include future dates for minimum payments and when the debt will be repaid in full.
Learn more: How to Borrow Money From Family and Friends
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.
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Frequently Asked Questions
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, particularly if you're paying off credit card debt. That's because the amount of available credit you're using accounts for up to 30% of your FICO® ScoreΘ. Generally, the lower your credit utilization ratio on revolving accounts such as credit cards, 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 using credit to pay for nonessential 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 FICO® Score. To keep track of your credit, you can sign up for credit monitoring for free through Experian.
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About the author
Tim Maxwell
Tim Maxwell is a former television news journalist turned personal finance writer and credit card expert with over two decades of media experience. His work has been published in Bankrate, Fox Business, Washington Post, USA Today, The Balance, MarketWatch and others. He is also the founder of the personal finance website Incomist.
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