When someone dies with credit card debt, state laws and the original contract terms dictate who owes, and what must be paid
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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).
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:
- If there is enough money, the Credit CARD Act of 2009 requires the executor of an estate to be informed of the amount quickly, and requires credit card issuers to stop tacking on fees and penalties during the time the estate is being settled. That portion of the law went into effect in February 2010.
- The Federal Trade Commission in July 2011 issued a series of guidelines for debt collection from decedents’ friends and relatives. The rules represent the FTC’s effort to find a middle ground allowing legitimate collection activity while reining in overaggressive tactics.
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.” Likewise, 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.
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.”