What Happens to Credit Card Debt After Death?

You can’t take it with you, but do credit card bills follow you into the grave?
Does the debt die with you? Or, can it come back and haunt those you leave behind?

General Rule:
The general rule is that any debt of a deceased person, including credit cards and medical bills, are solely the responsibility of the decedent or the decedent’s estate. The general rule assumes that no other person was the signer or joint obligator on any particular account or debt of the deceased person. If an account is the deceased person’s alone, the debt is the deceased person’s alone.

The most critical question when determining responsibility for a deceased person’s debt: is whether the debt was individual, or shared? If a spouse, family member, or business partner signed the credit card application as a co-signer (joint account holder),
then that person will be liable for the balance on that card along with (or, instead of) the deceased person’s estate.

When you die, your estate is responsible for paying off the balance of a credit card in your name. If the estate goes through probate, your administrator or executor will look at your assets and debts and, guided by the law of your particular state, will determine in what order bills should be paid. Any remaining assets after paying obligations will be distributed to the heirs by following your will (if you have one) or by state law (such as intestate laws if you don’t).

When Does a Credit Card Company Lose?
If the assets of a particular estate do not cover the bills, credit card companies have to “take the bullet”.
In this instance, a credit card company, as a creditor of an estate, is notified that the estate is insolvent (lacks funds to pay the credit card company). The credit card company writes off the bills and often that’s the end of it. Spouses, children, friends or relatives cannot inherit debt. A credit card company cannot legally force someone else to pay a debt which they did not assume prior to the date of the deceased person’s death.

Federal Law Governing Collection of Debts After Death
There have recently been changes in federal law altering the rules of engagement for collection of credit card debt after death:

If there is enough money in an individual’s estate to pay the debt, the CREDIT CARD ACT OF 2009 requires the executor of an estate to be informed of the amount quickly and requires credit card companies to stop tacking on fees and penalties during the time an estate is being settled. That portion of the law went into effect in February, 2010. The final rules implementing the law state, “If the administrator pays the balance stated by the issuer in full within 30 days, the issuer must waive any additional interest charges.” The final rule retains the proposed prohibition
on the imposition of additional fees so that the account is not, for example, assessed late payment fees or annual fees while the administrator is settling the estate.

The Federal Trade Commission (“FTC”) in July, 2011 issued a series of guidelines for debt collection from a decedent’s friends and relatives. The FTC guidelines were produced as a result of a recognition that many family members may be vulnerable emotionally and psychologically in the aftermath of a relative’s death and, therefore, there needs to be some protection against unscrupulous debt collectors. Debt collectors may legitimately contact individuals who are responsible to pay debts or individuals who are related to the deceased person in order to find out the identity of the person who is responsible to pay debts, at the same time, however, debt collectors may not mislead individuals into believing that they have the authority – or worse, the obligation – to pay the deceased person’s debts when they do not. Under the FTC guidelines, debt collectors are required to state that repayment must come from the deceased person’s estate and that the person being contacted is not required to repay the debt out of his or her own pocket or with assets jointly held with the deceased.

Community Property States
The question of who can inherit debt gets more complicated in states where “community property” laws apply. These states include Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Not all community property states play by the same rules and all states have variations regarding the impact of their community property laws on a deceased spouse’s debts. The bottom line is that in community property states a surviving spouse of a deceased person or an executor of a deceased person’s estate must ask more questions and consult an attorney to determine how the community property laws of that state impact a surviving spouse’s responsibility to pay the deceased spouse’s debts

What if There is No Probate Estate?
Not all assets go through Probate. Some items, such as IRA’s, 401k, brokerage accounts with pay-on-death clauses, and life insurance, typically pass to whoever is named as a beneficiary, which is one good reason to keep those designations up-to-date. In most cases, those assets are not considered a part of a deceased person’s estate. Essentially, those assets pass by designation of beneficiary at the deceased person’s death and bypass the deceased person’s estate.
Since these assets do not go through Probate, the executor cannot use them to pay the estate bills. The general rule is that any individual who receives title to these assets by beneficiary designation is not responsible for the deceased person’s debts.

A less clear area is when assets are owned by a deceased person’s living trust. A living trust is typically a trust which can be modified or amended by the deceased person prior to death and, therefore, is not considered a separate entity free from claims of the deceased person’s creditors. At the same time, assets owned by a trust pass outside of Probate from the trust to the beneficiaries named in the trust and, therefore, such assets are never included in probating a deceased person’s estate. It is much less clear as to whether assets in a trust established by a deceased person prior to death in which assets are titled are subject to the claims of the deceased person’s creditors. Many states, including Michigan, require a notice to creditors to be provided by a deceased person’s executor and deceased person’s successor trustee to a deceased person’s known creditors by an executor of the deceased person’s estate or the successor trustee of the deceased person’s living trust. Typically, it is most often the case that assets in a deceased person’s living trust at the time of his/her death will be subject to creditors’ claims should the creditor initiate a claim against the trust.

When Collection Calls Come
If you start receiving collection calls after the death of a loved one or friend, you need to determine three things:

  1. Is that debt valid?
  2. Is the debt within the statute of limitations or the time limit when creditors and collection agencies have the ability to collect on a debt?
  3. Are you individually liable for the debt?

One Key Factor to Remember is Never Rely Solely on What the Creditor or Collection Agent Tells You

While I have listed general rules above concerning the collection of a decedent’s debts from surviving individuals, there are exemptions to these general rules and, in some instances, the facts of a particular case will govern whether any survivor is possibly liable for the person’s debt. The best course of action is to contact your attorney or legal advisor if you are in a situation where you are facing a collection action by a creditor or credit agency for debts of a deceased person.

Dan A. Penning

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