Following a recent post on the rising levels of credit card debt among the elderly, several readers raised an important question: What happens when borrowers die? Do they take their credit card balances to the grave, or are those left behind responsible for the debt?
Tom from Vancouver Island, British Columbia, offered an answer: “Excess debt over the value of the estate is considered insolvent and cannot be passed on to heirs.” He’s right, it turns out.
Experts say that unlike a mortgage or a car loan, credit card debt is unsecured, meaning that it isn’t tethered to an asset. When someone dies, credit card companies have to wait near the back of the line to receive payment. If what’s left over after settling the estate isn’t enough to pay the bill, credit card debt is written off.
Spouses, children or other loved ones don’t “inherit” credit card debt unless they co-signed the card. (If one owner of a joint credit card dies, the others automatically become responsible for the balance due.) How to dodge that bullet? Never use joint credit cards, said Stephen Silverberg, former president of the National Academy of Elder Law Attorneys. If a card must be shared among family members, he said, one person should apply and sign for it, then add users afterward.
Be wary of collection agencies that try to convince you that you are responsible for payment on a card owned solely by a deceased parent. One commenter, Karen from Philadelphia, said that after her father died, credit card companies called and sent threatening letters. She stood her ground: “I knew that legally I was not responsible, but I’m sure the credit card companies convince many grieving relatives that they ‘owe’ this money when they really do not.”
If card companies come calling, said Jean Setzfand, director of financial security at AARP, “you have to establish the ownership of that debt — that’s the first thing you do. If there are no co-signers, really you want to distance yourself as much as possible from it.” Living spouses and children can call the bank and ask for a copy of the card or loan application to get proof of ownership.
Alternatively, be pre-emptive. After the death of a parent, send a letter or call the banks and credit card companies to cancel cards and let them know that the cardholder has died. Tell them that you are in the process of settling the estate and will keep them posted on your progress. “A great deal of credit card companies will actually stop charging interest at that point,” Mr. Silverberg said.
What gets settled before credit cards? Generally, administrative fees (like executors’ fees, filing fees, appraisals of property and tax-preparer fees), mortgages, reverse mortgages, taxes and even funeral expenses have to be paid off before heirs can inherit anything from the estate. As with credit card debt, heirs are not directly responsible for debt like mortgages or reverse mortgages unless they were co-signers.
But savings accounts that are “in trust” or “P.O.D.” (payable on death) can be returned to an estate to pay off a credit card or other debts, said Mr. Silverberg. Better to keep the money in an I.R.A. or other retirement savings account with clear beneficiaries; these accounts cannot be accessed to pay debt after death.
Sorting out debt is usually just the tip of the iceberg in unraveling an inheritance. Most of the headache, said Ms. Setzfand, can be avoided with a will. “If you make it well known who owns what, both in terms of assets as well as liabilities, you can prevent a lot of this from taking place outside of your control.”
For more information, see “Forces That Affect Your Estate Plan,” from the AARP, and answers to frequently asked questions about wills and estate planning, from the National Academy of Elder Law Attorneys.
