Hypothetical about debt repayment

Factual Questions
1

Man, is that a gripping thread title, or WHAT?!

Quick background: I have borrowed some money from my parents. My mind was on “idle” this morning in the shower, and I started thinking about what would happen if they died and my debt was passed on to my siblings.

Basically, I want to know the difference between the following scenarios:

Scenario A: I owe $10,000 to a single creditor. (Numbers are made up for nice roundness) It’s accumulating interest at some rate, x%. I’m paying it off by paying $500 a month to the creditor.

Scenario B: I still owe $10,000, but instead of having a single creditor, I have 10 creditors, each of whom I owe $1000. All ten of these debts are at the same x% interest. I am paying my debt off by paying $50 a month to each creditor, so I’m still paying $500 a month. There are no minimum payments or penalties or anything like that.

Scenario C: Same as in B, but instead of paying each creditor each month, my strategy is to pay $500 a month to creditor 1 until that $1000 + interest is paid off, then move on to paying creditor 2 until that debt is payed, and so on. Again - no minimum payments, no penalties.

My gut instinct is that - from my perspective as a debtor, all three of these scenarios are identical. That is, in each scenario, I will be debt free at exactly the same time, having paid exactly the same amount of money. Is that correct? Obviously, C and B will be different from the creditors’ point of view, since some creditors will be paid sooner than other creditors, but the numbers work out the same for me, right?

I think it is, and to be honest, it really doesn’t matter to me at all right now, but it’s nagging me in the back of my head, and I want someone to check me.

Thanks.

2

If your parents were to die, you would then owe your debt to the estate of your parents, not to each of your siblings. And in the interest of avoiding fees what often happens is that the amount you inherit is reduced by the amount of the outstanding debt.

3

What Quartz said. Your debt wouldn’t be passed on to your siblings, exactly. It would become an asset of the estate, and most likely discharged in probate by offsetting your share of the estate.

If the estate is never probated (ie., your parents don’t have any other stuff and nobody bothers to begin administration), the debt will be discharged.

4

Ignoring the real-life inheritance question, and sticking with the “dividing payments up among different creditors” question… I suppose one difference would be if the rounding were to affect things.

For example, if the interest on that $10,000 works out to $0.54, you’d owe the fifty-four cents. But if broken up among 10 creditors, the interest for each would be 5.4 cents, which would get rounded to 5 cents, thus saving you the princely sum of 4 cents on your interest.

In other words, there might be a difference, but a negligible one.

5

Debt is not generally heritable.

6

In Smeghead’s situation, the parents die with a promissory note owed to them. Their heirs can inherit that just fine. It’s literally the opposite of dying in debt, which I believe if what you’re thinking of.

If Smeghead’s parents died owning $10,000,000 in Microsoft bonds, do you think Microsoft would say “hey, debts generally aren’t inheritable. We’re not paying the estate or the heirs once it is settled.” Of course not.

7

It would be up to the executor of the estate to figure out how to “dispose” of the debt.
For simplicity (and your benefit) it would be simplest to rewrite the debt to eliminate your share, and create a debt to each other sibling for the balance (minus your share). I.e. you sign a debt agreement with your 3 siblings for $2500 each, maybe renegotiate interest rates… All the details are up for negotiation, of course, but everyone has to agree to change it. Of course, you and the parents could also have renegotiated the loan at any time, too.

Assuming your sister Sally is not talking to you and wants to cause as much grief as possible, you owe a partnership, consisting of you and 3 other siblings the full note ($10,000) once the estate is settled. Unless someone takes over management of this debt account, the lawyers will handle it all for you, for a fee. Otherwise, your brother Bob as the designated manager of the agreement (designated by the 4 of you) would receive the payments each month and forward the money to all 4 of you, minus bank fees, postage, etc. You make your $200 monthly payment and get about $50 back. This has the advantage of avoiding any scenario where Sally complains that you’ve paid Bob and Ted but not her…

Or, Bob as executor sells the debt to Sam’s Loan Shark Inc for cash, and you now owe Sam and his baseball-bat wielding buddies the balance to be paid at the terms agreed to with your parents… and everyone gets their 1/4 share of the payout, including you.

8

Setting aside the inheritance issue:

In case C, the creditors you’re not paying presumably are still accruing interest. You borrowed $1000 from each, at say 5%. By the end of the year, the creditors you haven’t paid off are each owed $1000 * (1 + .05/12)^12, or about $1051, and you haven’t even started paying them yet. So the later you start paying a creditor, the more money that creditor will ultimately receive. If it’s somehow set up so each creditor doesn’t start accruing interest until you get around to paying that creditor, then your creditors are either generous, or idiots. But yes, you wind up with exactly the same payment schedule as if you were paying a single creditors, or splitting your payment among all creditors.

9

I think you misunderstand this statement.

If a borrower dies owing a creditor money, it is true that the creditor can’t seek payment from the heirs (but they can seek payment from the deceased’s estate before the borrower’s heirs inherit whatever is left of said estate).

However, if a creditor dies, the borrower still owes repayment to the deceased creditor’s estate.

10

Regarding the inheritance aspect, this is an informal family transaction, and regardless of the intricacies of the law, I’d feel obligated to repay my siblings their fair share of the debt. Obviously I could just deduct the whole lump sum from my portion of the inheritance. But that’s not really what I’m interested in figuring out - this is just what prompted the thought question in the first place.

And, muldoonthief - yes, scenario C would certainly affect the creditors differently.

11

Addressing the mathematical question only: Yes, your instinct is right that all 3 scenarios are the same from your point of view (neglecting any issues of rounding as muldoonthief mentions). Think of a third party between you and your creditors: You make your payments to the third party who takes care of distributing the payments according whichever scenario is in force. As far as you’re concerned, the $10K debt is out there earning interest and your payments are going toward interest and principle appropriately. Who is holding what part of that debt and who is receiving the payments is going on behind a closed door and has no effect on you or on the time to pay off the debt.

12

I completely understand this. Smeghead said “I started thinking about what would happen if they died and my debt was passed on to my siblings” and that is factually incorrect.

13

No. You’re still wrong. What **Smeghead **wrote is factually correct for the reason that I and Machine Elf tried to explain. After his parents died their heirs would be entitled to collect his debt.

14

Exactly - you generate interest on unpaid principal. Whether you pay 1/10 of the money to each of 10 buckets, or fill one bucket at a time, the total amount left to pay determines the total interest due. As long as you pay the same amount every month, you will be fine.

the difference is - compounding? If you are strictly paying A until done, then moving on to B this is the issue:
You are not paying interest to B. So the debt to B is compounding - say 5% a year. You pay A, but B is still owed his $1000 and after a year, say, about $1050 (monthly compunding at 5%pa means it will be more). You would still pay the same amount however, because instead of paying that $50 in interest to B, you paid off A faster. the total you owe each month, and the total balance interest is calculated on (previous month’s principle less payment), is the same as if you owed $10,000 and were paying off the whole to one to one person. The difference is A will get teh whole lot paid off faster. B will see nothing until A is paid (a little over 20 months) but will then get a bigger amount.

15

Smeghead owes the debt to his parents. If his parents die, he owes the debt to his parent’s estate.

If SMEGHEAD dies, then Smeghead’s estate owes the debt to his parents. If there are not enough funds in the estate to settle the debt, then the debt is void, Smeghead’s heirs do not owe the debt to Smeghead’s parents.