Having Debt May Not Always Be So Bad
If you asked people whether they would prefer to have debt, or no debt, you’d probably get a resounding vote for “no debt.” Debt is bad, so we’re told, and we should do whatever we can to avoid it.
But those opinions often don’t consider asset protection and estate planning, which sometimes can reward or benefit those who carry debt. In many cases, being debt free can hurt you as much as it can help. That sounds counterintuitive, but there are reasons why you should stop and think before you become debt free.
How Debt Can Help
Often, debt that is secured can be a powerful asset protection tool. For example, a business that carries as much debt as it has value may have a bottom line value of zero. A car that is worth as much as you owe on it has no value.
Why does this matter? If you ever needed to file bankruptcy, or had a judgment against you where creditors were looking for assets, they could only take those assets that have a positive value to them, and generally, those that are unsecured. The debt reducing the value of assets acts as a type of shield from creditors. Debt, and particularly secured debt, can paint a financial picture of you that creditors may not want to deal with when it comes to collecting assets.
Many government programs, and public benefits, also will look to your net worth to see if you qualify. By having assets with nominal value because they have debt, you can often keep your net worth to a reasonable amount.
If you do want to pay off debt, it’s always best to pay off unsecured debt (credit cards or medical bills, for example), which provides fewer benefits than secured debt; tax debts, because government creditors have extraordinary powers to collect them; and most student loan debts, which are very difficult to discharge in bankruptcy.
Debt Can Have Tax Benefits
In many cases, the interest on debt payments can have tax benefits, especially when related to work or business. Even student loan interest has a tax benefit to it, although few people can benefit significantly from student loan tax benefits.
And if you’re considering getting rid of debt by settling it for pennies on the dollar, remember that any amounts waived or forgiven by a creditor can be considered income and will thus have a tax consequence unless an exception applies.
In the event you have some extra cash, there are smarter things to do with it from an estate planning standpoint than paying off otherwise reasonable, manageable debt. Obviously, this is not to say you should get yourself deep into unmanageable debt. Certainly, there comes a point where exorbitant interest eats up whatever asset protection or tax benefits that debt may have. And if you can’t afford debt payments, it’s not a good idea to get yourself in a financial hole.
Sometimes asset protection can be counterintuitive, and involve strategies you may not immediately think about. Contact Tampa business and probate attorney David Toback to discuss your needs and for ideas on how to protect your assets.