For most people, credit card debt is a personal issue. The same is true after you die. What happens to your credit card debt after you die? What role does your spouse or surviving family members play in paying off or assuming your debts? The answers may surprise you.
Your estate and its executor are responsible to pay off all of your debts with the assets that you have left after you pass away. But, your loved ones can often still face harassment from creditors and collection agencies long after you’re gone. It’s important that surviving heirs understand what happens to your credit card debt after you die.
Families are not responsible for the debt. Their estate is responsible, but that may not stop the collection calls.
Shortly after my uncle died last year, my aunt used all of the assets that he had in his name to settle his debts as the executor of his will. But he had quite a bit of credit card debt, and the estate quickly ran out of funds to pay off all of his creditors.
Debt collectors and credit collection agencies soon began calling my aunt. Despite not being a cosigner on any of the debt or having joint accounts, the creditors tried to pressure her into using her own funds to settle the remaining balances. The calls were relentless.
They even went so far as to try and list the delinquent debt on her credit report. Without knowing the law and understanding who the debt actually belongs to, many surviving family members unwittingly think that they’ve inherited the debt of their deceased loved ones.
Here are a few key considerations to ensure that you’re not on the hook to pay for your loved one’s credit card and other debt after they die:
Debt Belongs to the Deceased
Your loved ones can’t pass along debt to you like an inheritance. If you’re not a cosigner or hold the debt jointly in yours and the deceased person’s name, you can’t inherit debt. Cosigners and joint account holders are different though. You signed most likely promissory notes and contracts making your responsible in those cases.
This is just one of the many reasons why you shouldn’t cosign for someone’s loan. If you signed the credit card application in order to share and make it a joint account, then you would be responsible for the debt after your loved one’s death.
If you are just listed on the credit card account but only as an authorized user, you are not responsible for the debt after the primary account holder’s death. An authorized user is typically someone who just uses the credit card but didn’t sign the application, doesn’t pay the bills, and doesn’t have the debt reported on their credit report.
Instead, it is the responsibility of your loved one’s executor, who is named in the last will and testament, that will settle the debt with creditors on behalf of the deceased’s estate. Even if there is no will, the probate court will assign an executor or administrator to complete the necessary paperwork.
The executor will complete the steps to pay off the debts with the estate’s remaining assets. The executor pays off the debts in the order that state law requires. He or she will sell and liquidate assets that belong to the estate to pay off debts before the court can distribute assets to heirs through probate.
Some Assets Don’t Go Through Probate
Not all of the assets of a deceased person will go through the probate process though. Items like insurance proceeds, IRAs, brokerage accounts, and 401(k) retirement plans typically go directly to beneficiaries. State law does not consider these types of assets as part of the estate.
The beneficiaries receive insurance, IRAs, brokerage accounts, and 401(k) retirement plan proceeds directly from those separate insurance and investment companies regardless of the amount of debt a person dies while still owing. The executor of the estate cannot use them to pay off credit card or other debt.
It is one reason that it is important to have your beneficiary designations up-to-date with your insurance and investment companies. It will save your loved ones the hassles and delays of probate court.
What Happens If the Estate Can’t Pay a Debt?
If an estate runs out of assets and still has credit card debt or other debts to pay off, the credit card companies end up holding the bag. It’s like a game of musical chairs. The estate may not pay every credit card company if it runs out of money.
If there isn’t enough money in your estate to cover all of the debt after liquidating the assets, then the credit card debt ends there. The credit card company will write it off that amount of debt as simply uncollectible.
Mortgages and Car Loans
If your loved one dies with a mortgage, his or her heirs have a few options. With bank approval, someone else can assume the mortgage and continue paying the home loan. This may be a good option if you live in the house.
If you do not want to keep the house, the estate can sell it and pay off the mortgage with the proceeds. If the home is underwater and your loved one owes more than it’s worth, the estate may sell it and pay as much of the mortgage as possible. Or, it can conduct a short sale with bank approval or simply let the bank foreclose on the home.
The same is true with car loans for the most part. Many times the lender will let a family member take over the car loan or refinance it in order to keep the car. Or, the estate can sell the car and pay off the loan with the proceeds. Or, the lender could repossess the car as a last resort.
Why Creditors Chase Relatives
No lender wants to write off a loan. That’s why many are relentless in trying to convince a person’s heirs to repay debt. It’s important to know your rights and understand what is and isn’t your responsibility when dealing with a loved one’s debt.
Collection agencies know that many heirs are unfamiliar with the laws in their state. Thus, they try to push a family into repaying a loan that they legally aren’t responsible to pay. The estate and its executor are responsible to pay off all of your debts with its assets after you die.
Understanding your rights can help save you time, money, and headaches at a time when you least need them. It can be hard enough just grieving. You can protect your loved ones from more heartache with a little prior planning. You should understand your rights if you’re the surviving family member to also protect yourself.
Have you ever had to deal with the debts of a loved one after they passed away?