It is safe to say that America is experiencing a debt crisis. Most of us have at least one credit card balance that just doesn't seem to be going down! So what happens to our credit card balances when we die?
The good news is that, with some exceptions, surviving spouses and family members are not responsible for the leftover debt of their loved one. The bad news is that our estate is responsible for our leftover debt. That means that before anyone can inherit a single penny from the estate of a deceased person, all of his or her valid debts must first be paid. Credit card companies are more than happy to collect money from the surviving family of a deceased credit card holder, and it is important to know as a general rule that you are not responsible for the debt of another - even your spouse.
As a recent article on Bankrate.com points out, there are exceptions that could leave you on the hook for someone else's credit card balance after that person's death.
Joint Cardholders v. Authorized Users
If you're a joint cardholder, meaning you co-signed for the credit card, you're liable for the debt. Parents sometimes do this for children who are just starting out, or adult children will co-sign with their elderly parents, perhaps to help keep track of expenses.
If you're only an authorized user, you're not liable when the cardholder dies. If you co-signed as a joint cardholder, then you just got a new credit card debt.
"Sometimes, people can be on a credit card and not even know it," says Pennsylvania attorney Linda A. Kerns. "Maybe when they filled out the credit card applications, (the joint cardholder) didn't even tell them." These accounts could show up years later, at the time of a death or divorce.
"I tell people to check their credit card reports regularly. Resolve it before a death or divorce or traumatic event," says Kerns.
Checking your credit report annually is easy and free, and is the best way to quickly challenge inaccurate information and take address accounts that are either joint or have been misreported as joint.
Custody of Credit Card Debts in Divorce
It happens too often: One spouse agrees to pay off a joint card as part of a divorce settlement. But if the ex doesn't do it or dies before the debt is paid and your name is still on the card, the credit card company may come looking for you.
Furthermore, according to Texas attorney Glen Ayers, if you live in a community property state, you'd better hope you didn't receive community property in the divorce. "That divorce judgment does not bind the credit card company. It's going to chase you," he says.
The credit card companies don't care what your agreement with your ex is - they just know that you are legally responsible to them for the debt. It is extremely important to address all credit card accounts in your separation or divorce agreement, and to place clear deadlines by which all joint credit card accounts must be paid off and closed. Better still, the responsible spouse should be made to produce evidence of that to the other spouse, or face charges of contempt.
Using a Credit Card After the Death of the Cardholder
Continuing to use a credit card as an authorized user after the cardholder's death could put you in big trouble. "That's got criminal implications," says Ayers. "If somebody wanted to make a case of that, is that any different than picking up a card on the street?"
The same goes for using the card as an authorized user when you know the debt won't be paid. For example, says Kern, "You'd be committing fraud if you knew a parent was near death and the estate didn't have money and you used it knowing it wouldn't be paid off."
Given the Various Exceptions, Time Limits, and Complicated Rules on What Constitutes Estate Property, Talk to an Attorney Before Paying
Even if you are not held personally liable for the credit card debt of a deceased loved one, you'll feel the effects of it if you're a beneficiary of the estate. Debts will be paid from the estate before beneficiaries receive any distributions. But the estate is only legally obligated to pay debts out of "estate property". Property that is titled "jointly", including real estate, or where beneficiaries are named, including life insurance, may pass outside of the estate, and should not be made available to pay credit card debt.
In addition, there is a specific time period for creditors to file a claim against the estate. When an estate is probated, creditors are prioritized, but only if they file appropriate notices within the statutory period. If they don't, they could be out of luck.
Credit card debt is unsecured, unlike a mortgage, which is secured by property, or a car that is secured by the vehicle. So it's likely the credit card company will be at the back of the line when it comes to paying debts from the estate.
That doesn't mean the credit card company won't try to recoup the debt from family members, so don't fall for it if you know you're not liable. Taking some pre-emptive action, such as notifying credit card companies that the cardholder has died, will help prevent them from contacting you.
Before any debts are paid out of an estate, including credit card debt, consult your attorney. Even if credit card balances are owed, it is often possible to negotiate settlement of the balances for less than the full amount owed. Vaughn-Martel Law represents and assists clients who have been named as the executor, administrator, or representative in managing the estate of a loved one.