Three out of four consumers die in debt, says Yahoo Finance’s recent article, “What Happens to Credit Card Debt When You Die?” That means the executor has to pay the debt, and the money comes from what might have been an inheritance. If you have many debts, the inheritance may become very small—or vanish altogether.
If you’re worried about your family being stuck with your debts after you die, know your rights and work with an estate planning attorney to help protect your assets.
When a family member dies, relatives typically won't have to pay off his or her credit card debts. However, there are some exceptions. A spouse or other family member might have to pay debts, if he or she:
- Co-signed for a loan or credit card;
- Jointly owned property or a business;
- Lives in a community property state (California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin); or
- Is required by state law to pay a debt, like health care expenses, or to resolve the estate.
An authorized credit card user doesn't have to pay off the deceased's debts, unless one of the conditions listed above is applicable. If it’s a joint account, the surviving cardholder must keep making on-time payments to avoid late fees and negative credit reporting. If sorting out debts is causing stress, a family can check the deceased's credit reports.
Unless you have a living trust or make other arrangements, a probate court will determine your financial affairs after you die. In most states, the executor named in the will is responsible for handling the final details of your estate.
When the deceased has credit card debt and assets, the big question is if the assets are available to the creditor. If the deceased had a life insurance policy, proceeds go to beneficiaries before any of the debts are repaid. If the deceased had assets, credit card debts and other debts, the executor must know that the beneficiaries can't get money before the bills are paid.
The first debt the estate has to pay is secured debt, like a mortgage or car loan. The estate then usually pays administrative and legal fees, followed by unsecured debt, like credit cards. Creditors are required to submit their claims against the estate by a deadline determined by state law. If that claim meets the deadline, and the estate has sufficient assets, it must be paid. The rules vary by state, and arrangements made prior to death will impact the amount of debt that must be paid.
An estate planning attorney will be able to work with you, if you are completely honest about your debts. Depending upon your situation, it may make sense to place some assets into a trust, so that the asset won’t be available to creditors. The laws governing trusts are different in each state, so sit down and meet with an attorney who practices in Texas.
Reference: Yahoo Finance (August 19, 2019) “What Happens to Credit Card Debt When You Die?”