When You've Passed On, Who Inherits Your Credit Card Debt?

Death grave cemetery
Death grave cemetery

When we die, we leave all kinds of things behind, including our debts. And it's not always clear what exactly happens to those obligations.

Consider your credit card debt. According to Aaron Crowe at the Credit.com blog, your heirs are not likely to be stuck with it, though some parties might want you to believe otherwise.

It's not unheard of, for example, for a debt collection agency to contact the bereaved, seeking loan repayment. Thanks to the Fair Debt Collection Practices Act, there are many rules that those debt collectors must follow.

For example, anyone seeking to collect on the debt of a deceased person needs to address that person's estate, by contacting the executor or whoever is in charge of it. (If you believe a collector who has approached you is violating any rules, contact a lawyer.)

There are more recent regulations governing debt collection and the deceased that can also help. First, the Credit CARD Act of 2009 expects credit card issuers to inform an estate's executor quickly about any sums owed, and to not add fees and penalties while the matter is being settled. Then, in 2011, the Federal Trade Commission issued guidelines in 2011 aimed at reining in aggressive collection activity related to deceased debtors.

Who's Responsible?

Typically, the estate of a deceased person is responsible for his or her debt. If a debt has been held solely in the name of the deceased, it's paid off with assets in the estate, sometimes by selling property (such as a house or car) in order to generate the funds with which to do so. If the debt exceeds the assets, the estate notifies the card issuer that the estate doesn't have some or all of the money owed, and the sum is generally written off by lenders.

It's not always quite so simple, though. If the deceased was married, and a spouse was a joint owner of the account or co-signer on the debt, then the spouse is generally liable for that debt.

In community-property states, things get muddier, because debt taken on during a marriage can be considered community property, even if it was only in the name of the deceased. This is another situation where seeking the counsel of a lawyer is a good idea.

Being an authorized user on a credit card account doesn't mean you're liable for that debt if the cardholder dies, but it can still cause problems. Crowe tells of a New Jersey man whose credit rating was damaged when creditors reported unpaid debts to credit agencies that were related to his late mother's account, on which he'd been an authorized user. Simply using a card, whether you're authorized or not, can lead to collectors calling.

Keep in mind that even if you're sure you're not liable -- or are fairly certain you can make a good case for that -- it can be costly to be absolved, as lawyers and the legal process aren't free.

If You're an Heir

If a loved one dies and you expect to inherit some money, know that you won't be first in line. You'll receive your due only after creditors are paid, and even they come after categories such as taxes, mortgages, and funeral expenses.

Certified financial planner Jeffrey Field recommends that when a relation passes away, you cut up his or her credit cards and send them to their issuers, along with a notice of the death (including the date). Alert the three main credit reporting agencies as well -- Equifax, Experian, and TransUnion -- asking them to close their reports on the deceased. In addition, look into whether the deceased had insurance to cover credit card debt remaining after death. It's not always a smart coverage to buy (as it's best not to let credit card debt accumulate), but if it's there, it can be put to work.

The good news is that there's a good chance that a loved one dying with credit card debt won't hurt you much or at all, financially. Learn the rules, so that you don't have to deal with unnecessary headaches.

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