What Happens to the Credit Card Debt After You Die?
No one likes to consider their own mortality, but unfortunately one day everyone will pass on. Ideally, we would leave our loved ones and descendants with an estate that can continue to provide for them. However, it is possible that you may leave behind less than you’d like and may incur debt near the end of your life.
If you have credit card debt, you may wonder what will happen to it if and when you die. This article will explain what will happen.
What Happens to Your Debt After Death?
When you die, all of your assets (your home, stocks, your car, etc.) and liabilities (bills, debt, and so on), will become part of your estate. The executor of your estate will then be tasked with managing the estate. It’s their job to make sure your liabilities are handled before anything is passed on to your heirs.
In the case of credit cards, your balance is an unsecured debt. That means that unlike a mortgage, which is backed by the value of your home, there’s no asset providing security to the lender. For a secured debt, like a mortgage, your mortgage lender may require the house be sold to pay the loan off. The estate might also continue making monthly payments. Any extra cash will be added to your estate. Once all of your secured debts are paid, the remaining value of your estate will be used towards unsecured debt.
If the value of your estate is enough to pay off all your credit card debt, the remainder will be distributed to your heirs. If you still have a balance remaining, the credit card companies will have to write off the loans.
What happens to the debt of the deceased?
|Type of debt||Who inherits the debt?|
|Credit Cards||If a deceased person's estate cannot cover the balance of his or her credit cards, the companies will have to write the debt off. Payments on behalf of the deceased relative are voluntary and not required. Joint account holders and cosigners, are responsible for the unpaid credit card balance.|
|Car loans or leases||If the departed's estate cannot cover the balance, the creditor has the legal right to take back the ca. Should the family wish to keep the vehicle, they can continue to make the car payments.|
|Apartment leases||If the deceased tenant had a lease agreement for a specified term, the tenancy continues to the end, even though the tenant is dead. Responsibility for the lease agreement passes to the deceased tenant's executor as named by the court.|
|Personal loans or other installment loans that are not collateralized||Creditors of unsecured debt can collect against decedent’s estate from available assets, and a priority ranking system outlined in the law determines the payment of the creditor claims. Joint account holders and cosigners are responsible for the unpaid balance.|
|Student Loans||If the deceased still have student loans to repay, it will be discharged as long as a family member provides a certified copy of the death certificate to the school or to the loan officer. If you are a parent PLUS a loan borrower, then the loan may be discharged after you die, or if the student on whose behalf you obtained the loan dies.|
|Mortgage||If a person dies with a mortgage, that mortgage will have to be paid off if the heirs want to keep the home. If an individual passes away with additional debt, including credit card debt, the house may have to be sold to pay those debts.|
What Rules Should be Followed After Death
When a loved one passes away, the first thing that you should do is compile a list of their liabilities. This includes mortgage debt, condo fees, property taxes, utility bills, and of course, credit card debt. The executor of the estate should then take over the responsibility of using the estate’s assets to pay the bills.
You should never use a credit card belonging to someone who has passed, adding to the estate’s debt. Doing so could be considered fraud and is doubly bad if the estate cannot pay the balance in full.
A very important rule to follow is to only make payments on debts using the estate’s assets. If you make payments out of your own accounts, you may be seen as assuming liability for the debts.
Does Credit Card Debt Transfer to My Family?
The good news for people with credit card debt is that in most cases, your debt will not transfer to your family. If your estate cannot cover the balance of your cards, the companies will have to write the debt off.
There are a few cases in which it is possible for your credit card debt to be transferred to someone else.
The most common scenario is if you had a joint cardholder. Many married couples will open a card jointly. This gives them the benefit of allowing both people to access and manage the account. However, because the account is jointly owned by both people, the debt is owned by both equally. If one cardholder passes away, the other cardholder will become responsible for the full balance.
Co-signers would also be responsible for the debt. When you co-sign on a loan or credit card, you don’t get the benefit of access to the money, but you are providing the lender with extra assurance. Co-signers promise that if the borrower cannot make payments, they will in their stead. This can help people with poor or no credit, like children, get their first card. However, if the cardholder passes away, the co-signer will have to take over the payments.
In the case of joint cardholders who are no longer married, things get complicated. If your ex-spouse agreed to assume the credit card debt in a settlement, you might still be liable. If they pass away and your name is still on the account you’ll have to pay. In states with community property laws, your spouse might have to sell their property that became commonly owned to make payments. These complicated situations highlight the importance of a good estate lawyer who can help handle these matters.
Will Credit Card Companies Come After My Family?
Though they might not be legally liable for the debt, it is possible that collectors may contact your family. If your estate does not make timely payments on your debt your account may be sent to collections. This is quite possible given the confusion and stress that the death of a loved one can cause. Many collection companies use scare tactics or outright lies to try to collect the money.
These companies may contact your loved ones claiming that they’ve inherited the debt and have to pay. They may even try to affect your loved one’s credit scores. They could also tell your family that they’ll take money from your assets that do not pass through the probate process, like life insurance payouts.
These tactics can be highly effective on people who are dealing with a death in the family. It’s important that your family know what they are legally liable for and try to avoid dealing with these companies as much as possible.
To minimize the chance of debt collectors contacting your family, it is important that the card issuers be informed of your passing as quickly as possible. That will prevent them from sending your accounts to collections after a missed payment or two.
If your family is harassed by debt collectors, they should contact the Consumer Financial Protection Bureau. The CFPB’s job is to protect people from financial abuse, and they will help fight sketchy debt collectors.
What If I’m an Authorized User?
The good news is that authorized users are in the clear. When a cardholder makes someone an authorized user, they are promising to pay any debts incurred by that person when they use the card. Because the authorized user makes no promise to make payments, they cannot be held liable for the debts.
However, authorized users should be careful. You cannot use a credit card if the account holder has passed away. You also shouldn’t use the card if you know that the cardholder is near death and the debt won’t be paid. If you use the card in either of these situations you could be charged with fraud.
Tips for Handling Credit Card Debt After Death
There are a few steps you should take to minimize the impact that your debt has on your loved ones.
The first is to have a frank conversation about your finances. If your loved ones are aware of how much debt you have, they will be better equipped to handle it when you pass. Dealing with the shock of someone dying and finding out that they were deeply in debt is difficult. It’s easier, but not by any means easy, to handle a death without the surprise of debt.
Another step to take is to take the time to name specific individuals as your beneficiary for things like your 401(k) or insurance policies. Many of these assets bypass the probate process. That means that the money won’t become part of your estate and creditors cannot take it to pay debts. The money will pass directly to your heirs. If you don’t name a beneficiary, the money will go to your estate, where it can be taken by creditors.
Make sure you have a sufficiently large life insurance policy. A common piece of advice is to make sure that your policy would be enough to pay off debts on any community property. Alternatively, the policy should pay your family’s living expense for a few years. So, if you are your spouse purchased a home together make sure your life insurance covers the mortgage in full. At the very least it should cover years of monthly payments. That will give your spouse the chance to handle their new debt while adjusting to life without you.
An alternative is loan protection insurance. If you cannot open a life insurance policy, loan protection insurance provides similar protections.
Finally, the best way to protect your loved ones from your debts is to do your best to pay them down. The more you can pay on your debts, the less debt you will leave to your loved ones. Leaving no or few debts make your estate much easier to manage and means your heirs will receive as much as possible.
Unfortunately, there are people that become involved in scams and fraudulent activities after a loved one dies. Because not all people are aware of the laws concerning death and debts, they fall victim to claims of money owed. Death notices are made public online and in newspapers and as a result, scam artists can target family members easily.
Phone calls or letters requesting payment are often successful because those in mourning want to do right by their deceased loved one. They may feel pressured to pay the supposed debts without asking for proper documentation and proof.
Debt questions should be referred to the estate attorney and evidence of the debt owed should be requested before any money is exchanged.
Scheduling an appointment with an estate planning professional can be a wise idea, no matter what age you are. It can certainly help to have professional guidance when addressing your finances in life and after death.
Remember, there are many things to account for when you die -- including the cost of your funeral expenses, paying off your creditor balances, and ensuring your loved ones are properly provided for after you are gone. You can also visit with an attorney to ensure you have a will created that outlines exactly what your wishes are concerning your assets and your loved ones.
While death is unavoidable, many people dismiss the importance of pre-planning for the inevitable. If you want to ensure your family is well cared for if and when something does happen to you, start making preparations on paper now and continue to update your will and estate documentation throughout the years.