What Happens to Credit Card Debt When You Die?
Death and Debt: Part One
What happens to your credit card debt when you die?
Having taught over 200 classes to over 4,700 high school students, I’ve heard most of the financial questions that worry our teenagers. From the challenges of affording college to trying to understand the intricacies of a credit score, our youth have a strong and real interest in personal finance. Among their most earnest concerns, though, is family debt. They worry both about their parents’ credit card debt and what would happen to that debt if something happened to their parents.
Are your children, siblings, spouse, or parents responsible for your credit card debt if you pass away?
Upon your death, credit card companies cannot seek payments from any family members except possibly your spouse. Your credit card debt becomes a liability of your estate (the collection of your assets of value, from real estate to cash to investments). If your estate’s assets cannot pay for your liabilities, the credit card company writes off the debt as uncollectable.
Who May Still Have to Pay My Credit Card Debt If I Die?
If you and a spouse live in one of the community property states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin (and Alaska with an opt-in possibility), your surviving spouse will have to pay for any credit card debt you incurred during the marriage.
Even in non-community property states, your surviving spouse will retain the responsibility to pay any joint account debts, including credit cards the two of you opened jointly during your marriage.
Who Won’t Have to Pay My Credit Card Debt If I Die?
Regardless of where you live, even a spouse will not be required to repay any credit card debt you incurred before your marriage, so long as you have not added his or her name to your account.
In general, your parents, children, and siblings have no legal obligation to pay off your credit card balances should you die, whether with or without a surviving spouse.
The Indirect Cost of Credit Card Debt to My Children
If you die without a surviving spouse, and if your will specifies certain assets (cash, property, etc.) should go to your child(ren), sibling(s), or parent(s), keep in mind that your estate will have to pay your debts and financial obligations throughout the probate process first.
If your estate does not have enough cash to pay for your debts and cover your estate fees, it will begin to liquidate (sell) your investments and other properties of value. This may mean the loss of a home you had intended to go to your child or children upon your death.
What If I Run up My Credit Card Debt Knowing I’m about to Die?
Hopefully, no one is considering this possibility, because it may do more than flirt with financial fraud if you run up your credit card debt knowing you’re about to die. When you knowingly use deception for personal gain, you have committed fraud.
Knowing that you are not going to be around to repay a debt and using it to benefit yourself or your family tends to fit the definition of fraud. Of course, you would have to have foreknowledge of your impending death.
It may seem a bit morbid, but suppose you find out you have a terminal medical condition, and you want to take your brother or best friend on a three-week cruise across the Atlantic and around the Mediterranean. It seems like a sweet gesture. Using your credit card with no intention of paying the debt, though, will taint the experience with possible legal ramifications.
But since you won’t be around, who is the credit card company going to go after for the payment? First, they would seek payment from your estate (any sellable assets you leave behind). If your estate becomes insolvent (i.e. if the sale of your assets doesn’t pay your debts), credit card companies tend to be left to write off the remaining balances. If the balances seem significant enough to the credit card companies, and they suspect fraud, they may investigate the possibility of recouping your debt from others involved. That might even include the individual who benefited from your fraudulent generosity.
What If My Surviving Spouse Can’t Afford to Pay My Credit Card Debt?
Check your life insurance policy to see if it will cover your credit card debts upon your passing. Be sure your spouse is aware of the policy information, including the name of the company, the policy number, the name of your agent, and your agent’s phone number. Because it might take several weeks or longer to receive a payout from your insurance policy, your surviving spouse should contact the credit card company to notify them of your passing and explain the situation.
If your surviving spouse falls heir to your credit card debt and cannot afford to pay it off or even meet the minimum monthly payment obligations, he or she might first consider calling the credit card company directly to work out a reasonable repayment plan.
Otherwise, the following options may help address the surviving credit card debts.
If your surviving spouse cannot work out an acceptable repayment option with the credit card companies, then the next step might include contacting a nonprofit credit counseling agency like Money Fit to set up a debt management program.
The final two options will have a dramatically negative effect on your spouse’s credit rating: debt settlement and personal bankruptcy.
Debt settlement involves contacting your creditors to request that they accept less than the balance owed. This would require your spouse to have a sum of cash sufficient to make the offer of interest to the creditor.
Many third-party companies offer to provide this negotiating service for you. However, they also charge 25% or more of the amount they negotiate off your balance. Additionally, your surviving spouse will likely have to pay taxes on the amount of debt written off by the credit card company. Worst of all, though, is the reality that the creditors could sue your spouse long before she or he is able to come up with the 50% they might accept.
As a final option, your surviving spouse may have to consider filing for bankruptcy to protect a home, an income, or other assets of value. However, since most credit card companies don’t usually get much from the bankruptcy process, they prefer to work out other arrangements.
What If My Estate Can’t Pay Off My Credit Card Debt?
When you die, all of the possessions, assets and financial obligations that belong to you alone in non-community property states become part of your estate. To note again, in community property states, the surviving spouse “inherits” all assets and liabilities from the marriage.
In planning for your estate, keep in mind that your estate incurs fees it must pay before disbursing proceeds to your heirs, with the general exception of your surviving spouse. Without a surviving spouse, though, your estate will have to pay certain fees and taxes before disbursing proceeds.
Some fees and taxes will take precedent over other financial obligations. Generally, before distributing any proceeds or valuables to family members, your estate must first take care of fees incurred by the estate (attorneys and executor). Then, the estate must pay taxes and debts secured by property (e.g. mortgage, vehicle). Unsecured accounts like credit card debts typically get paid last if at all.
The estate must also continue to pay ongoing administrative fees that include bills such as utilities and property taxes for any related real estate until the probate process (confirmation and transfer of ownership) is over.
In community property states, the credit card company will continue to send bills to you until your surviving spouse or your estate notifies them of your passing. From then on, the credit card company will send the bills to your surviving spouse or the estate. However, based on most state laws, if you incurred the debts before your marriage, your surviving spouse will need to notify the credit card company of your passing, at which point the credit card company will have to write off the debt as a loss.
What debts are not forgiven with the debt of the consumer?
While most debts are basically canceled with the borrower’s death if the spouse is not an account co-owner, secured debts survive. These debts must be paid by the deceased’s estate and include a mortgage, home equity loans or lines of credit, and vehicle loans.
What proof of death do I need to provide to discharge my family member’s student loan debt?
Student loan service providers require specific documentation to discharge the deceased’s loan. First, notify the lender of the family member’s death, confirm where to send the document, then send an original, certified copy, or accurate and complete photocopy of the death certificate.
About the Author
As the education manager for Money Fit, author, speaker, and financial educator, Todd Christensen develops financial education programs and provides credit and debt counseling for individuals and groups around the country. In 2014, Todd published his first 5-star-rated book, Everyday Money for Everyday People based on stories and ideas he had heard in nearly 1,000 workshops he facilitated on budgeting, credit, debt reduction, saving, and identity protection.