One of the unwelcome certainties in life is death. You could worry more about how bills will be handled after your death if you have credit card debt. You might be concerned about who will be accountable for paying off the debt or whether the loan will be discharged after your death.
The simplest response is that, especially when borrowing alone, credit card debt is the borrower’s problem and not anyone else’s. Real-world circumstances, however, are more challenging. Additionally, when lenders advise friends and relatives to use their own money to settle someone else’s debts, this can lead to confusion and fear.
Your Estate Pays Off Your Debts
Everything you own at the time of your death, including cash in bank accounts, real estate, and other assets, is known as your estate. Any remaining assets will be given to your heirs after your estate has been settled, which entails that everyone you owe money to has the right to receive payment from it.
The time that lenders have to collect debts is finite. Your executor—your personal representative—should inform your creditors of your passing. It can take place either through a public notice or a letter delivered to the lenders. Then, debts are paid off one at a time until they are all paid off or your estate runs out of money.
Various Forms of Debt
The kind of debt you have will affect how it is settled after your death. Once more, there is a priority in terms of which debts are paid off and how. On the list, credit card debt is pretty low.
One type of personal loan is credit card debt, and most other personal loans are managed in a similar way. Lenders must rely on the estate’s assets to cover the debt because there is no requirement for collateral to secure the loan.
In most circumstances, student debt is also insecure. At the borrower’s passing, these loans are occasionally dismissed (or forgiven). There is a good likelihood that the debt can be eliminated, especially with federal loans, which are more consumer-friendly than private student loans.Private lenders are free to enact their own rules.
When you use borrowed funds to purchase a home, the debt is often protected by a lien on the house. Unless that obligation is settled, the lender will be able to foreclose on the property, sell it, and seize the money owed. You’re in a similar situation if you take out a second mortgage or a home equity loan. Don’t anticipate the lender to foreclose right away because federal legislation makes it simpler for some family members and heirs to take over home loans and maintain the family home.
Auto loans are secured loans as well because the vehicle is utilized as security. The lender may reclaim the vehicle if payments fall behind. But most lenders just want their money, so if someone else picks up the tab, they won’t seize the property.
Debt Repayment After Death
Lenders are out of luck if your estate doesn’t have enough assets to pay off all of your debts. For instance, if you owe $10,000 and have just $2,000 in savings, your creditors will write off the remaining balance and suffer a loss.
Your estate, however, also consists of assets like your house, car, jewelry, and other possessions. Any assets that belong to your estate can be used to pay off your debts. Your personal representative is accountable for making sure that all creditor claims have been addressed prior to dispersing assets to heirs, whether in accordance with instructions in a will or in accordance with state law. The estate may need to sell something to get money if there isn’t enough money to pay all the bills.
It’s likely that the estate will need to sell the house in order to settle its debts, including credit card debt. However, the options open to creditors are governed by state law. Local courts frequently determine whether an estate must sell a residence or whether liens can be filed on the property.
Non-Probate Real Estate.
The only thing that can be used to pay off debt is estate property. Assets can pass to heirs without going through probate or becoming a part of the estate, and this happens frequently. The probate process is expensive and time-consuming.
Assets that avoid probate are not obligated to be used to settle debts. Generally speaking, assets that belong to heirs directly cannot be taken by creditors, but there are a few exceptions. For instance, a life insurance policy’s death payout is often shielded from creditors.
Some types of assets have a designated beneficiary or detailed rules governing what happens to the assets once the account owner passes away. A beneficiary is someone or something the owner designates to get assets after death.
The use of beneficiaries is a possibility, for instance, in life insurance policies and retirement accounts like an IRA or 401k. Assets can flow to the beneficiary directly without going through probate with the right beneficiary designation. Any directions in a will are overridden by the beneficiary designation. The will is irrelevant since beneficiary choices allow you to completely avoid the estate and the will only applies to assets that are included in the estate.
A joint tenancy with rights of survivorship is one of the most popular strategies for assets to avoid probate. As an illustration, a couple may be joint tenants on an account. When one of them passes away, the remaining owner automatically assumes ownership at 100%. 5. There are advantages and disadvantages to this strategy, so weigh all of your options with a lawyer and don’t merely use it to evade debt repayment.
Trusts and other arrangements are just a couple more strategies to prevent assets from going through probate. Consult a local estate planning lawyer to learn more about your choices.
Community Property and Marriage
An asset is transferred to heirs after the estate settles any obligations. If someone believes they will inherit a certain thing, it can be perplexing. The item has not yet been transferred, and if it needs to be sold, it might never reach its intended buyer. Unfortunately, although the estate formally pays the obligation, to the heirs it feels like they are.
Even though the surviving spouse never signed a loan arrangement or even knew the debt existed, there are rare circumstances when a surviving spouse may be required to repay debts that a deceased spouse incurred. Spousal funds are combined in states where there is common property, which can occasionally be an issue.
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are states that have community property laws. Alaskans have the option to determine how community property is handled. If you’re responsible for paying a deceased spouse’s debts, speak with a local attorney. There are opportunities to have some debts forgiven, even in states where community property exists.
Some debts of a deceased borrower must be settled by family members or friends. When there are several borrowers on an account, this happens frequently.
More than one borrower may open certain accounts. However, it can occur in any partnership. Married couples experience it the most frequently (including business-related partnerships). The debt on a credit card is typically 100% the responsibility of each borrower. It makes no difference whether you never used the card or divided your spending evenly.
Co-signing is a kind gesture because it involves risk. When a cosigner applies for credit on behalf of another person, the cosigner’s favorable credit rating and reliable income help the borrower’s application get granted. But cosigners can only promise that the debt will be repaid; they cannot really borrow money. In most cases, you must pay back the amount if you cosigned and the borrower passes away. There could be a few exceptions (for instance, the demise of a student loan borrower could result in a discharge—or other issues), but cosigners should always be prepared and eager to pay back a loan.
When the original borrower passes away, additional cardholders are often not compelled to pay off credit card debt.
These people don’t have a formal contract with the credit card company; they were merely given permission to use the card. Because of this, the credit card company usually cannot sue an authorized user or harm the user’s credit. However, if the principal borrower leaves a card (or card number) behind and you’re an authorized user, you can frequently do so. You must apply for the card through the issuer and be accepted based on your personal credit rating and income.
Avoid misleading lenders.For instance, it could be tempting to go on a spending spree if it’s clear that death is impending and the deceased won’t have any assets to pay expenses. In the event that the courts rule that this was unethical, a permitted user might be required to repay the loan.
Calls from Debt Collectors
After a death, managing debts can be challenging. Along with the emotional strain and never-ending activities that need to be completed, you also have to deal with a complex system of debt collection regulations.
In order to collect unpaid debts, collectors frequently contact the family and friends of a deceased borrower. Each state has its own set of regulations. Any person who is not compelled to repay a debt should not be misled by a lender. The law only permits this kind of communication so that lenders can speak with the individual in charge of the decedent’s estate (the personal representative or executor).
Avoid giving debt collectors any personal information, especially your Social Security Number, and ask that any correspondence be in writing. You can ask collectors to leave if they arrive at your house.
Some debt collectors will make an effort to deceive family members in order to collect on debts. They might try to convince them that they must pay back the debt. Although the majority of debt collectors are trustworthy, there are undoubtedly some rotten apples. Refer lenders and debt collectors to the personal representative managing the estate if you are not liable for a debt. Request in writing that persistent collectors stop contacting you.
If assets pass to you, they are likely off-limits to creditors who want to seize them. If the personal representative and banking institutions handled the situation correctly, your inherited assets should be safe from creditors.However, if in doubt, consult a lawyer.
If someone approaches you to settle a credit card bill on behalf of a deceased person, seek legal counsel. Collectors are frequently perplexed and impatient to just gather. They can even be dishonest at times. Never assume you are responsible just because someone else says you are.
Making an estate plan
It’s a good idea to make arrangements in advance if you have credit card debt so that your death will be less stressful for your loved ones.
Estate planning is the act of preparing for death, and it is wise for everyone, regardless of wealth. You’ll discuss significant issues, including your will, healthcare directives, ultimate desires, and more, during that process. It’s also possible to get trickier and manage your assets after your death by employing strategies like irrevocable trusts.
When you pass away, life insurance may be used to settle debt. Life insurance safeguards your loved ones, especially if someone else will be liable for your debt. It can be applied to a variety of tasks, including paying off credit card debt or mortgages, including home equity loans.
Simplify your finances before you die.Your executor’s job will be made much simpler. If you have a lot of unused accounts open, you might want to think about closing them, but be careful not to damage your credit. It may be possible to consolidate multiple loans into one, and you may even end up saving money on interest.
Assets can avoid probate and are unavailable to creditors when they pass to a specified beneficiary. For a joint account with a right of survivorship, the same might apply. However, the assets can end up going to your estate if there are no live beneficiaries. To learn about the beneficiary requirements of your retirement account custodian and life insurance provider, contact them. It will differ from business to business. Once assets are included in your estate, they might need to be used to reduce debt. Periodically, check to see if your beneficiary designations are still appropriate.
Executors deal in clearing up debts
It’s crucial to manage a deceased borrower’s debts properly, whether you’re the executor of an estate, or the personal representative or administrator, depending on the circumstances.
Ensure that you obtain additional certified death certificates. Numerous organizations will require notice, which you must give. There may be different requirements for a “copy” of the death certificate, but it is advisable to have official records from your local vital statistics office; obtain more than you anticipate using.
Contact the borrower’s creditors and inform them of their demise. To be sure you’ve given enough notice, check with a local attorney. (Since you might not be aware of all creditors, you’ll need a method of informing opportunistic creditors.) Notifying creditors also stops someone from accruing debt in the deceased’s name.
Make sure to also report the death to the Social Security Administration. It may be advantageous to creditors and can aid in preventing identity theft and other issues.
get the deceased’s credit history. Use this report to determine which lenders should be informed of the borrower’s passing. Notify all prospective lenders even if the borrower has a balance of zero, since you don’t want a credit card (or credit card number) to be available to thieves.
Work with an attorney if you have any questions. You can avoid costly and time-consuming blunders by paying a price.
You will need to prioritize debts if the estate does not have enough funds to pay each creditor who has made a claim, using state law as a reference to the list’s order of importance. Don’t begin making payments until you are aware of all the claims. Taxes, funeral costs, and child support are often given higher priority than credit card debt.
Please wait before distributing assets, please. Before distributing any of the remaining estates to heirs, be sure all claims have been paid in full. Nobody wants to keep the heirs waiting, but it’s crucial to get everything right. Although you are not required to use your own money to settle the decedent’s obligation as the executor, you risk being held personally accountable if you make a mistake and fail to honor a legitimate claim.
If you’re unsure of how to handle a problem, seek assistance; doing so is perfectly acceptable. You were selected by the deceased based on your judgment, and you may decide that you need expert help (and the heirs will just have to deal with that).
Estate administration is a difficult task. It is made even more difficult by the emotional toll that losing a loved one takes. You can get legal and accounting advice locally to help you navigate the procedure and ensure that nothing worsens.
Questions and Answers (FAQs)
What should I do if a debt collector contacts me regarding the credit card account of my deceased spouse?
Declare your spouse’s passing to the collector and offer to send them a copy of the death certificate. Most of the time, this is all they need to write off the debt if there is no estate or to get reimbursed if there is. Don’t offer to settle the outstanding sum and don’t respond to inquiries regarding life insurance proceeds if you weren’t a co-borrower on the account. Be firm but cool.
Can debt collectors use the life insurance my relative gave me to cover her obligations after she passed away?
Most of the time, no. The money is sent to you directly. To be certain, consult a lawyer as state laws can differ.
Can I pay off my credit card debt using funds from a deceased person’s bank account?
Yes, provided that it is a joint bank account with your name on it. If the bank account is in both of your names but the credit card debt is only in the deceased person’s name, you are not required to use that account to settle the debt unless the probate judge orders you to do so. You must follow the steps outlined in the decedent’s will if your name is not on the bank account. In your state, it can be illegal to withdraw money from a deceased person’s bank account without having your name on it. To find out how to proceed, see a probate attorney.
This article’s material is not intended to be a substitute for professional tax or legal advice. The laws of your state or the most recent changes to the law may not be reflected in this article because state and federal laws are often changed. Please contact an accountant or lawyer for current tax or legal advice.