How Can I Protect My Inheritance from Creditors?

Dear Debt Adviser,

I'm about to receive an inheritance and would like to use some of it to buy a home. But I'm wondering if I'll run into trouble due to some unpaid medical bills from 24 years ago. Also, my credit score is zero. How can I protect this inheritance from creditors? What's the best action for me?

-- Julia

Dear Julia, I can't tell if your inheritance would make a dent in the debt to those medical providers. I also can't tell if it'll allow you to buy a house without a mortgage. But I'm sure that your credit score isn't zero! Chances are that you have at least a minimal credit history, and that means you'll have a credit score of at least 300 for FICO or 501 for VantageScore.

If your inheritance is huge, then you can just buy a house outright. You won't have to worry about your credit score, but you will still have to deal with your creditors. But, for this column, I'm going to assume that your inheritance is not enough to buy a home, and that you'll need decent credit to get a mortgage.

So let's get started. Get copies of your credit reports so you'll know for sure what your credit files contain. You can access your reports from the three major credit bureaus -- Experian, Equifax and TransUnion -- at AnnualCreditReport.com . Copies of your reports are free from each bureau one time per year. Most medical providers do not submit information to the credit bureaus. However, once any unpaid medical bills have been sold or sent to collections, the debts are much more likely to show up on your credit reports.

Review your reports and make sure the information is accurate and not outdated. If you find anything that is not correct, dispute the listing with the bureau that is reporting it. Once you know what is being reported, you will have a decision to make on how to move forward. Your 24-year-old debt is well past the statute of limitations for it to be collected through the courts. It's also well past the seven-year period in which it can show up on your credit report. However, more recent medical debts may be reported on your credit reports and available for collection in the courts.

Next, look up your credit score. You can get a free copy of your FICO credit score by enrolling in a 10-day trial of their product Score Watch. You can cancel any time during the trial period and pay nothing or keep the program for $14.95 per month. Depending on how low your credit score is, you may need to wait until your credit score has time to improve before seeking a mortgage. The difference in interest rates for a decent credit score and a bad one can mean paying tens of thousands of dollars more in interest for the life of the loan.

To protect your inheritance from the legal actions of your creditors, you will need to be concerned with any debts that have not passed the statute of limitations for collections in your state. You can check out Bankrate's chart of each state's statute. Should your creditors decide to sue you in court for what is owed, it would be difficult to hide a large inheritance. Rather than trying to hide your good fortune, a better route may be to settle your debts. You can do this yourself, or you can use an attorney to negotiate on your behalf. Just be sure that you do not send any type of payment until you have the settlement agreement in writing.

Good luck!

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