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Can Someone Else Pay Off My Debt?

If you’re struggling with credit card balances, loans, or other debts, you might consider seeking financial help from a close friend or family member. Sometimes, a generous relative may offer to alleviate your financial burden by paying off your debt. While accepting monetary help can be awkward, it can also be a viable solution to avoid financial disaster. Here’s what you need to know about having someone else pay off your debt.

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

Yes, someone else can pay off your debt, but there are important considerations to keep in mind to avoid unintended consequences.

Creditor Rules

Most financial institutions allow others to pay off your debt, but there may be stipulations. For instance, if you’re behind on mortgage payments, your lender might reject a partial payment that doesn’t bring your account current. Additionally, some creditors may need to verify the payment source to ensure it’s not from an illegal origin.

Terms May Change

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

Tax Implications

When someone else pays off your mortgage or another significant debt, it could be considered a gift under tax laws. More details on the tax implications are provided below.

Relationship Impact

Accepting financial help from a friend or family member can be risky, especially if they expect repayment or use the gift as leverage in future disagreements. Honest conversations beforehand can help build trust and set expectations. Formalize your agreement with a loan contract or promissory note that outlines repayment expectations, including future dates for minimum payments and when the debt will be fully repaid.

4 Ways Someone Can Pay Off Your Debt

If you have a friend or relative willing to help, here are four ways they can facilitate the debt payoff:

1. Give You a Cash Gift

The easiest way is for your donor to give you the money directly. If the amount is large, they could transfer it to your account, send it via a mobile payment app, or issue a check or money order.

2. Pay Your Creditor Directly

Your donor can make a direct payment using your account number. They can visit the creditor’s website, call customer service, mail a check, or visit a branch office to make a payment.

3. Link Their Bank Account to Your Debt Account

This option is practical if your donor wishes to make monthly payments on your debt.

4. Use Their Credit

Your donor might pay off your high-interest credit cards by refinancing your debt with a low-interest loan or a 0% intro APR balance transfer credit card in their name. They’ll generally need good credit to qualify, but reducing the interest rate could save money in the long run. The creditor may require your donor to add your name as an authorized user or open a joint account to transfer the debt balance.

Will I Be Taxed if Someone Pays Off My Debt?

Your tax liability depends on how you receive the payment. Generally, you don’t have to pay taxes on money received as a gift. However, the giver may need to report the payment if it exceeds the IRS annual gift tax exemption of $17,000 for 2023. Fortunately, a $12.92 million lifetime gift tax exemption exists, allowing substantial gifts under this exemption.

If your employer pays off your student loan or other debt, the payment is considered taxable income and will be included on your W-2, subject to payroll tax.

Eliminating Debt Can Boost Your Credit Score

When someone pays off your debt, your credit score may improve. The amount of available credit you use accounts for up to 30% of your FICO® Score. Generally, a lower credit utilization ratio benefits your credit score.

With your debt gone, you can build your credit by practicing good financial habits. Avoid debt on non-essential items unless you gain a permanent asset, like a house. Paying your bills on time is crucial, as your payment history makes up 35% of your credit score. Keep track of your credit by checking your score and report for free with Experian, or consider credit monitoring for a more hands-off approach.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. We’re here to help you navigate your financial journey with confidence.

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