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The truth about inheriting debt

Dear Dave,

My in-laws have lots of debt. In fact, they're always joking that the debt they'll leave us is more than the inheritance. How will this affect my wife and family if they die with all their debt still in place?

— Matthew

Dear Matthew,

You do not inherit debt. Either your in-laws are misinformed, or it's just a bad joke on their part. Now, if you were foolish enough to cosign on a loan with them, then you'd be liable for the remainder of that loan. But if they ran up $100,000 in credit card debt on their own before they died, then the credit card companies just don't get paid. It wouldn't cost you a dime, except that you might get no inheritance from them, because what they left behind would be sold to pay off as many creditors as possible.

Here's an even bigger example. Let's say they owned a home, and they're behind on the mortgage or upside down on the house — meaning that they owed more on it than it's worth. You can just hand it back to the mortgage company. You're not legally or morally obligated to accept the house and the situation surrounding it because it was left to you in a will. Just because it's family doesn't make it jump over onto your plate!

Let me say it again, Matthew. You don't inherit debt. Don't let creditors, or anyone else, tell you differently.

— Dave

Dear Dave,

What do you think about land as an investment?

— Tara

Dear Tara,

I'm okay with the idea of raw land as an investment. Someone has to buy the dirt that holds the earth together, right?

The only problem with this kind of investment is that it doesn't really create cash flow, unless it's farmland. In the real estate world, we call raw land an alligator because it eats. You have to pay taxes on it every year, plus you have upkeep and maintenance of some form or fashion, and it doesn't create an income. The only time it creates income is on the back end, when you sell the land.

It's not a terrible investment, Tara. But it's not a great one, either. I buy pieces of raw land here and there, every once in a while. But mainly I stick with income-producing investment properties.

—Dave

Dear Dave,

I recently traded in my old truck for a much newer one. I purchased an extended warranty at the time, and now I feel like I was pressured into buying it and that it was a mistake. What do you think?

— Laura

Dear Laura,

Cancel it, if you still can. The reason you felt pressured is because you probably were pressured by a pushy salesman. Seventy-five percent of what you paid for that plan went straight into the dealership's or salesman's pocket as commission. There's even a chance they made more off the extended warranty than the sale of the truck!

Extended warranties are only about 12 percent actual, statistical risk. The other 12 to 13 percent goes to miscellaneous overhead and profit. On top of that, the company that wrote the warranty probably didn't make as much on it as the dealership did. It's weird, but that's how a lot of those models work.

I don't buy extended warranties, Tara. In my mind, they're just rubbish. Besides, if you buy something and can't afford to fix it if something goes wrong, then you couldn't really afford the purchase in the first place!

— Dave

• Dave Ramsey is America's trusted voice on money and business. He's authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money Smart Kids. It will be released April 22nd.

The Dave Ramsey Show is heard by more than six million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

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Published March 15, 2014 at 9:00 am (Updated March 15, 2014 at 1:19 am)

The truth about inheriting debt

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