- What happens to credit card debt after death
- Sometimes, the credit card company loses
- Changes in rules of engagement
- Community property complications
- State that employ community property law
- What about the assets?
- Hounded after death
- When collection calls come
- What to do with accounts after a death
- Laura’s story
- What Happens to Debt When You Die?
- What Happens to Debt After You Die?
- Can I Avoid Probate?
- Are There Any Exceptions?
- What Should I Do if My Loved One Dies with Debt?
What happens to credit card debt after death
You can’t take it with you, but do credit card bills follow you into the grave? Does that debt die with you? Or can it come back to haunt those left behind?
There’s no one-size-fits-all answer. A number of factors, including where you live and who applied for the card, can radically alter the situation.
Here’s the simple part: If the card was yours alone, with no joint account holders, the debt is yours alone, too.
When you die, your estate is responsible for paying off the balance. If the estate goes through probate, your administrator or executor will look at your assets and debts and, guided by law, determine in what order bills should be paid. Remaining assets will be distributed to heirs by following your will (if you have one), or state law (if you don’t).
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Sometimes, the credit card company loses
If the assets don’t cover the bills? “If there isn’t enough money, credit card companies would have to, as my students say, ‘suck it up,’ ” says Doug Rendleman, law professor at Washington and Lee University.
Creditors are notified that the estate is insolvent. They write off the bills, and often that’s the end of it. Children, friends, or relatives can’t inherit debt. A card company can’t legally force someone else to pay.
The most critical question in whether the living still bear responsibility for a dead person’s debt is: Was the account individual, or shared? If a spouse, family member, or business partner signed the card application as a co-signer (joint account holder), then that person will be held liable for the balance on that card, along with (or instead of) the estate.
If that second cardholder is merely an authorized user (didn’t sign the application, isn’t liable for bills and merely has charging privileges), then he or she isn’t responsible.
Changes in rules of engagement
Two changes in federal law have altered the rules of engagement for collection after death:
Community property complications
The question of who can inherit debt “gets a little more complicated in community property states,” says Michael R. Kerr, senior manager of U.S. government affairs at Enova International. Generally, assets accumulated during a marriage are considered joint property in community property states. But, in some cases, so are debts.
State that employ community property law
- Alaska (opt-in)
- New Mexico
States that employ community property laws: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska also has community property laws, but only if spouses voluntarily enter into such a community property agreement. Not all community property states play by the same rules. “All states have variations,” says Rendleman.
So if your husband or wife has a separate card account and runs up debt, at death “it’s possible that debt could pass to the spouse,” says Kerr. But it isn’t always cut and dried. “I think there is case law going either way,” he says.
Bottom line: In community property states, “you have to ask more questions,” says Kerr.
What about the assets?
Not all assets go through probate. Some items, such as IRAs, 401(k)s, brokerage accounts, and insurance, typically pass to whomever you’ve named as a beneficiary, which is one good reason to keep those designations up to date. In many cases, those assets aren’t considered part of the estate.
Since these assets don’t go through probate, the executor can’t use them to pay estate bills. So can the credit card company go after the person who inherits?
With employer-based pension plan accounts, such as 401(k)s, the answer is no, says Bruce Wolk, co-author of “Pension and Employee Benefit Law” and law professor at the University of California-Davis. Since the plans are protected by federal law, that won’t vary by state.
Insurance also usually passes outside the estate, and in most cases it’s also safe from creditors, says John H. Langbein, Wolk’s co-author and professor of trust law at Yale Law School.
With IRAs, “it’s a state-by-state question,” Wolk says. “Although many states exempt IRAs from that kind of claim.
” wise, with other assets, such as a brokerage account or bank account, the answer may vary from state to state.
Many states allow a house to pass from one spouse to another after a death without letting creditors intervene; many have laws that protect the family home from creditors.
The question can get more complicated if the house is in just one name, or if it’s passing to a child, other family member or friend. If the home becomes an issue (or you’re just worried that it could), talk with an attorney to find out exactly what a creditor can and can’t do.
Hounded after death
After Patricia’s husband died with a $14,000 balance on one credit card, she started getting collection calls. Patricia, a widow living in Oregon, asked that her last name not be used.
For a few months, while the estate was being settled, she kept up payments. There wasn’t enough money in the estate to pay the entire bill. She learned that, as an authorized user, she wasn’t responsible for her husband’s credit card. So she stopped making payments. And that, she says, is when things got ugly.
Over the next 32 months, Patricia received regular calls from six different collection agencies. The card company also reported her to the credit bureaus for nonpayment. A letter to the Comptroller of the Currency, which regulates national banks, fixed her credit report. But the calls continued.
“They would send me letters and yell at me on the phone,” she says. Calls came at all hours, seven days a week.
She repeatedly asked the card company for proof that she was a co-signer on the account, she recalls. They assured her she was but refused to show her any documentation. Finally, she received a court summons: The company was suing.
Patricia hired an attorney, who drafted a letter explaining once again that she was only an authorized user. The creditor dropped the suit.
“They didn’t understand the hell they put me through,” Patricia says. But she learned something. “Don’t let them bully you,” she says. “Stand your ground. Make sure you get the facts. And challenge them.”
When collection calls come
If you start getting collection calls after a death, you need to determine three things: is that debt valid; is it within the statute of limitations (the time limit that creditors and collection agencies have to collect on a debt), and are you in any way liable for it? You also need to correctly handle collection calls.
Never rely solely on what the creditor or collections agent tells you.
They didn’t understand the hell they put me through. … Don’t let them bully you.
As host of a national consumer call-in show, Dave Ramsey has heard all kinds of stories. Some collectors “will say anything,” he says. “They’ll even lie to you and say you’re liable when you’re not. That doesn’t mean they can collect.”
Joe Ridout, consumer services manager for Consumer Action, a national advocacy group, has also gotten an earful from consumers. “There are some shockingly inventive things collection agencies will do to get someone to pay a bill they don’t owe,” he says.
Worried about what action a card company or collections agency could take? “Check with a lawyer,” says James P. Caher, attorney and co-author of a book about bankruptcy law. “Don’t pay them any money. Don’t believe them.”
What to do with accounts after a death
If a family member dies, the executor can notify the creditors. If you’re handling that duty yourself and creditors need to be contacted individually, gather the bills, call the card companies, and inform them the account holder has died. Find out where to send a certified copy of the death certificate.
Include a note with the deceased’s name and credit card account number. Keep a copy for your records, and mail it so that you have proof of when it was sent.
If representatives ask about payment, refer them to the executor.
Don’t promise anything until you know what assets and bills the estate has, and what your rights are.
Sometimes card companies, such as American Express, will offer to let you take over an account if you agree to assume the debt and can pass a credit check. If your credit isn’t as good, you may not inherit the same low interest rate or high credit limit; if you don’t want the account, close it.
After Laura’s mother-in-law died, the family discovered she had no credit card debt but quite a few credit accounts. “We were concerned that someone could start using the cards,” Laura says. She is a resident of Indiana who asked her name not be used.
They decided to close them. But even though Laura’s husband had a power-of-attorney for his mother’s affairs, “they wouldn’t talk to him,” she says. “They wanted it in writing. They wanted the paper.”
She says she had to send multiple notification letters and track who responded, who didn’t, which accounts were closed, and which remained active.
After a death, Laura says, “it’s just one more thing that’s a lot of work.”
See related: Handling collection calls for a dead person’s debt, State statutes of limitation for credit card debt, Stop paying your late mother’s credit card debt
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What Happens to Debt When You Die?
What happens to debt when you die varies from state to state and is determined by probate laws. Unfortunately, leaving behind credit card and other debt can prevent your heirs and beneficiaries from receiving what you wanted them to have. In some states, your surviving spouse may even have to pay off a portion of your debts!
The best way to avoid this regrettable fate is by ensuring that your Estate Plan and Will are official, appropriately updated, and finalized well before you pass away.
In the event your loved one died with debt or you’re curious for yourself, we’ve got you covered! We break down exactly:
What Happens to Debt After You Die?
When you die with debt, the person named as executor in your Will (aka the person you’ve appointed to handle your affairs) will have to go through the probate process.
Typically, your estate’s assets (anything from jewelry to artwork to fine china) will be used to pay your outstanding bills.
There are some assets that aren’t included in this process because they are not technically owned by your estate (for example, a life insurance policy, IRA, or 401(k)). But for the most part, if you have assets, they will go towards your debts.
Unfortunately, this means your beneficiaries will ly receive less than you intended for them in the event you have unpaid debt.
Credit card debt specifically is usually the last debt that is paid back because it is an unsecured debt. A mortgage loan is secured by property, a car loan is secured by the vehicle, etc., and those remaining balances are paid first. Secondly, the estate will often pay for the family’s administrative and legal fees.
Finally, unsecured debt (i.e. credit cards) are paid back last. So if your estate doesn’t have enough assets to pay back that credit card debt, the creditors take the loss.
Your state’s probate laws will determine exactly what actions are available to creditors — whether that be selling your property or simply having liens placed on the home.
It’s also important to note that creditors have a set period of time in which they are required to file a claim against your estate after you pass (and this deadline varies from state to state).
Can I Avoid Probate?
Yes. There are ways to avoid probate. The best way to do so is by having a Living Trust created before you die. Because the trust “owns” those assets and not your estate, the assets under your Trust are not subject to probate.
Keep in mind that having your assets in a Trust doesn’t necessarily mean you are entirely protected from creditors if you have debt. It just means you’ll have a lot more flexibility compared to what you’d face during probate.
With a Trust, your executor has more control and can do their best to negotiate with creditors to (hopefully) reduce your debt.
Credit card companies can still sue, but because there are such high upfront costs associated with filing a claim against a person who has died, creditors typically opt for a settlement.
This, of course, highlights the importance of Estate Planning.
Are There Any Exceptions?
Fortunately, it's unly that any of your surviving family members will have to use their own money to pay for your debt after you’ve passed. That’s your estate’s job. There are however, a few exceptions:
Cosigner of credit card or loan: In the event you are the cosigner on an account held with a decedent, you would be responsible for paying off the debt on that specific account.
Jointly owned property: Similarly, if you have any jointly owned credit card accounts or property with a decedent, you’d be required to pay the balance on that account or loan.
Community property states: If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin (or, when special agreements are made, Alaska or Oklahoma), you live in a community property state. In those cases, spouses would be required to pay off anything that was community property: property owned jointly by the married couple.
It’s required by state law: Certain states also may require family members of the decedent to pay debts health care expenses, or to resolve the estate. In addition, if you were legally responsible for administering the estate and didn’t comply with certain state probate laws, you may have to pay off that portion of the decedent’s debt.
What Should I Do if My Loved One Dies with Debt?
Did you or someone you know have a loved one who recently passed away with debt? Our condolences. We know that the last thing you want to think about is having to deal with your loved one’s affairs and negotiating their debts.
But unfortunately, it’s a task that must be completed as soon as possible in order to avoid potential consequences. For example, computer hackers have been known to scour online obituaries in search of identity theft candidates.
That said, here are a few steps that can be taken to ensure your loved one’s debts are managed appropriately:
Know your rights. As we’ve mentioned, probate laws are different in every state. Most require creditors to file a claim within a certain period of time and family members to post a public notice of death before any money can be collected.
In addition, The Fair Debt Collection Practices Act (FDCPA) prevents creditors from using unfair or offensive tactics when collecting credit card debt from decedents. Remember, the decedent’s estate is required to pay off their debts starting with secured debts first, so don’t let a collector prey on your emotions in an attempt to get paid first.
It can also be helpful to submit a proof of claim request so that you have documentation for your records.
Collect important documents. If your perished loved one kept their important financial documents in a legacy drawer, this step is simple. If not, the surviving spouse can request a copy of the decedent’s credit report. Their credit report will reveal any account on which their name is listed.
Prevent further spending.
This may sound obvious, but it’s necessary to ensure that no credit cards in the decedent's name are still in use — even if you’re the authorized user on the card and you want to purchase items related to your loved one’s funeral or burial.
Doing so is a sure fire way to complicate things down the line. It’s also smart to be wary of any subscription services the decedent may have held. Recurring payments set on automatic withdrawal can be easily forgotten.
Notify creditors and credit bureaus. Finally, set aside time to call the three most common credit bureaus (Equifax, Experian, and TransUnion) as well as the decedent’s creditors.
Start by requesting multiple copies of your loved one’s death certificate so that you can send official notice to creditors and life insurance companies. Next, make the calls (or letters) to necessary creditors and close every account in the decedent’s name.
Lastly, reach out to Experian, Equifax, and TransUnion to ask for a “credit freeze”. This will prevent the decedent’s name and accounts from being unlawfully used.
Estate Planning shouldn’t be complicated, expensive, or something you dread. Instead, look at it as something that will provide you and your family comfort knowing that your important affairs will be well taken care of. Dying with debt may not be ideal, but with a thorough Will in place, you can avoid putting your loved ones through additional unnecessary grief and stress.