Debt After Death

Death and debtPersonal debt has become pervasive. All generations now tend to carry that burden. And, death, of course, is inevitable. Therefore, a financial question frequently being asked is: What happens to the debt after a person dies? Are the survivors stuck paying it off?

The issue emerges, for example, when the terminally ill want to get their financial affairs in order. It also gets factored in when the healthy calculate how much life insurance to buy. They wonder if the amount should cover what is likely to be their average outstanding debt so that their loved ones are not saddled with it upon their death.

The simple answer is that all the unsecured debt belonging only to that person vanishes upon the death. Therefore, that is one less thing for the dying to fret about. And in calculating the amount of insurance policies, many debtors will not have to factor in unsecured debt. “Unsecured” means no assets backing it as collateral, such as real estate, a vehicle, or a business. Therefore, the credit card companies, which provide those lines of credit unbacked by anything, are out of luck. They may attempt to intimidate, with threatening letters and phone calls, the survivors. They can contend that the survivors must pay off the credit cards. However, credit card companies have no legal claim. Should the harassment continue, survivors can send a certified letter stating they know their legal standing and that they are not responsible for the debt.

But most things aren’t simple. Neither is debt upon death, which is governed by state law. For example, that $40,000 in credit card debt might have been charged on a “joint account,” where more than one person signed for it. That other person might never have used the account or has even forgotten co-signing. But state law mandates that he or she must pay off the balance. This happens frequently in a marriage, a divorce in which one party agrees to pay off the debt but dies before doing so, when parents co-sign for children, and when adult children co-sign for their aging parents. Obviously, co-signing is never a good idea. The financial industry is innovative and there are always new vehicles for managing and monitoring someone else’s account without becoming a co-signer. Some of those are apps for the smartphone.

Those who are “authorized users,” not co-signers, do not inherit the debt. That holds whether they use the card or not. They could be liable for criminal charges, though, if, as authorized users, they run up extraordinary charges when they know the person is dying and won’t be able to pay off the balance. Also criminal is to use the card after the death.

Should there be an estate, then before heirs get anything, creditors have first grabs, beginning with the secured ones. If that auto loan is for $10,000 and car’s market value is $3,000, then the finance companies will try to make themselves whole by deducting the remainder from the estate. Should the estate have $30,000 in cash and the only creditors are credit card companies with a collective balance of $25,000, then they can collect on that directly from the estate. That leaves the heirs with only a $5,000 inheritance. If there is only $10,000 in cash but there are assets such as paintings, then those credit card companies will legally require that the assets be sold and they be reimbursed from the proceeds.

Things get a lot more complex in what are known as “community property states.” That means that everything, both assets and liabilities, is shared by both husband and wife. That traditionally holds, even if the spouse’s name is not on an account such as a credit card. Those states are Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, and Texas. That is why those planning to marry, who are already married in community property states, or who relocate there should consult with a lawyer. They need to know in detail what their financial obligations are, what they can be in the future, and what ways there are to protect themselves from the others’ debts.

There are those, of course, who want to do the “right thing,” not just comply with the law. They include relatives who pay off credit card debt, even when not legally obliged. One motivation is to “clear” the deceased’s name. Creditors welcome that behavior and will tend not to persuade the person to do otherwise. Ethics and legal are often far apart in what is required.

Photo credit: tim ellis / Foter / CC BY-NC

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