It may not be the most pleasant thought to entertain, but have you ever considered what will happen if you or a family member dies with outstanding credit card debt?
“A number of factors, including what state you live in and who applied for the card, can dramatically alter the answer to this question,” says Wanda Strickfaden, president of Improve Credit Consulting Firm and author of “Credit Repair: Real Answers to Your credit Problems.”
Although there's no catchall rule that applies to all circumstances, there are four basic rules that govern what happens to debts that remain after someone shuffles off this mortal coil.
1. The estate pays the debt
If the deceased, and the deceased alone, is the one responsible for a debt (in other words, the deceased took out the debt alone with no co-signers or joint account holders), survivors are not responsible for the debt. (However, things can get tricky if a surviving spouse lives in a community property state. See below.)
So what if the deceased leaves thousands of dollars in debt behind?
According to Don Ford, a Texas lawyer whose firms specializes in estate planning, probate, and wills and trusts, the debts of the person who has died are the responsibility of his or her estate. This means that the debt will be paid from whatever assets the decedent leaves behind. If there are no assets — or the debt exceeds the assets — the creditors are simply out of luck and can't come after family members.
“We handled a case a few years back where a guy died with about $85,000 in credit card debt to his name, but he had no assets. The credit card companies had no option but to simply write off all of it,” Ford says. “This happens all the time, and credit card companies build those losses into their cost of doing business every year.”
Ford says it's important to note that credit card debt is typically not the only financial responsibility a decedent leaves behind. That's why individual states have classification systems that set the priority of which debts get paid first.
“In Texas, we have eight different classes,” says Ford. “The first is for funeral expenses, which means that whatever assets are left behind will first go to paying those. The next class is for administrative fees like accountants and attorneys. The third class is for taxes. And so on. Credit card debt is going to receive the lowest priority in almost every state, which means everything else needs to be paid first, and only then can the credit card company collect on what's left.”
Keep in mind, not all assets are up for grabs. According to Ford, funds such as individual retirement accounts (IRAs), brokerage accounts, 401(k)s and insurance policies are typically exempt from being used to pay creditors.
“For instance, if your husband dies with a 401(k), it would be a good idea to leave as much money in that plan as you can,” says Ford. “This is a good way to hedge against creditors since they can't touch that money.”
Likewise, says Ford, life insurance proceeds are exempt from creditors if they're made payable to someone other than the estate, i.e., such as a beneficiary.
“So if a dad names his two kids as beneficiaries, and the life insurance proceeds go straight to them, that money cannot be used to pay off his debt,” says Ford.
2. Joint cardholders = joint responsibility
According to Maryland attorney Gary Altman, credit card companies can seek repayment outside of the estate if there is another cardholder on the account. However this applies only to joint account holders — not authorized users.
“In this case, a cardholder is anyone who applied for that card, not someone who is simply authorized to use that card,” says Altman. “Let's say you signed the credit card contract along with your now-deceased husband or wife. You are liable for that debt.”
3. Relatives can't inherit debt
Here's some good news: Relatives who have no joint contractual responsibility for a decedent's line of credit cannot “inherit” that person's credit card debt. In fact, according to Michael Duffy, a Philadelphia attorney whose firm specializes in estate planning, probate and consumer credit issues, relatives who are not joint cardholders on a decedent's credit card have no financial obligation whatsoever to pay off the debt.
“This does not vary by state, and relatives of the decedent are protected from creditors by the federal Fair Debt Collection Practices Act [FDCPA],” says Duffy. “There can be severe penalties for violating those provisions, and if that appears to be the case the relative should contact an attorney. They are already suffering the loss of a relative. They don't need unlawful harassment on top of it.”
Sometimes creditors don't always abide by this rule, and if you find yourself being hassled by collectors for a deceased relative's debt, credit expert Wayne Sanford offers a simple solution.
“Don't let them bully you,” he says. “Send them a copy of the death certificate and ask them to show you the legal document where you signed that stated that you were financially responsible for that debt. If no such document exists, you probably won't be hearing from them again.”
If, for some reason, collectors persist, it may be time to contact an attorney who specializes in FDCPA violations, says Michelle Dunn, an author and columnist who specializes in how consumers should respond to collection calls.
“You can also send them a cease-and-desist letter clearly stating they have the wrong person and that you are not legally responsible for this debt,” says Dunn. “If they contact you after that, file a complaint against them with the Federal Trade Commission, the Better Business Bureau and their state offices. Also, make sure you keep all of your paperwork so you have a paper trail.”
4. Community property states can cause complications
If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin or Alaska, you may run into some complications when it comes to settling credit card debt after death. That's because these 10 states employ some variation of community property laws, which means most debt incurred by either spouse during a marriage is considered “community debt.” And when it comes to community debt, both spouses can be on the financial hook, no matter whose name a debt is in.
According to John Palley, a California-based lawyer who specializes in estate planning, trust and probate law, each community property state will handle this matter differently. If a husband or wife has a card in his or her name only and then dies without having paid off the debt, the surviving spouse may be financially responsible — but not always.
“I know that here in California, generally speaking, the community is not responsible for the decedent's separate financial obligations,” says Palley. “[Creditors] could, in theory, come after the surviving spouse's assets, but in my experience credit card companies tend to walk away. It's just not worth the time and money it will take to collect on those assets.”
Palley suggests that residents in community property states consult a lawyer or financial planner before tying the knot. That way they'll know what to expect in the event one of them dies with unpaid debt.