As you start to create a will, you may wonder what happens to your credit card debt after you die. Will your heirs have to pay it off? Or does it just disappear? Learn what happens to the debt.
After you die, your estate pays for your credit card debt. After your credit card debt and other debts are paid, then your heirs receive your remaining assets. If your estate is not enough to pay off your debt, your heirs likely don't have to pay it, but there are some exceptions.
Continue reading to learn more about how the executor of your estate pays off your credit card debt after you die. You will also learn what steps your family should take after your death and when they may be responsible for any remaining debt.
What Happens to Your Credit Card Debt When You Die?
Many people like to plan ahead for the future of their loved ones. Part of this means ensuring your will is in order so your loved ones can receive your assets. But while you can outline what happens with your assets, what about your debts?
You don't have a say in whether your debts are paid after you die or how that payment happens. It all depends on the situation and the relevant laws. That being said, it is important to understand what happens to your credit card debt after your death.
This will help you better plan what you are leaving for your loved ones. It will also give your heirs more guidance as to what to expect.
Does Credit Card Debt Die With You?
The short answer to whether credit card debt dies with you is no.
Your estate is responsible for the remaining debt. In other words, your credit card must be paid before your heirs receive their inheritance.
Do You Have to Pay Credit Card Debt After Death?
Yes, you have to pay your credit card debt after death. But because you are dead, your estate will pay for it. As a reminder, your estate refers to the assets you had when you died.
You will have an executor of your estate, who is responsible for handling and dividing your assets and debts. You can name your executor in your estate plan or will. If you didn't name someone, then a probate court may appoint someone.
As mentioned, your estate pays for your credit card debts and other debts. So, any debts that you have at the time of your death are subtracted from your loved ones' inheritance.
As a simplistic example, assume that you have $1,000 in credit card debt and $100,000 in assets when you die. The executor of your estate would use some of your assets to pay off the debt, leaving $99,000 in your estate. This $99,000 would then be divided among your heirs as outlined in your will.
What Happens to Credit Card Debt When You Die With No Assets?
The above situation makes sense if you die with enough assets to pay off your credit card debt. But what if you don't have enough? Or what if you die without any assets and only with debt? In either case, your estate is insolvent.
To start, your estate will pay off as much of the debt as possible, leaving your heirs with nothing. If you have no assets at death or your debt is greater than your assets, don't expect your heirs to inherit anything.
The question becomes whether your heirs are responsible for paying off your remaining debt. This depends largely on the situation.
When Your Heirs Are Responsible for Your Debt
There is a good chance that your loved ones will not need to pay for any debt that your estate cannot pay off. At this point, your credit card issuer will just have to write off the debt. However, there are a few situations when they will be responsible for your debt.
Joint Account Holders Are Responsible for the Debt
If someone is a joint account holder with you on a credit card with debt, they can be responsible for the remaining debt. As a reminder, a joint account holder is someone who cosigns or co-borrows with you. Your credit card company will have checked both of your credit scores and reports before issuing the card. Importantly, your paperwork outlines that both of you are responsible for the debt.
Authorized Users Are Not (Usually) Responsible
There is a very important distinction between a joint account and an authorized user. With a joint account, both parties have equal responsibility for paying the debt. By contrast, an authorized user is simply someone you let use the account. You are still responsible for the account.
As such, authorized users on your account typically won't need to pay off any credit card debt.
Spouses May Be Responsible for the Debt
As mentioned, authorized users only don't usually need to pay the debt. There is one major exception for spouses in some states.
This will depend on whether you live in a community property state. If you do, your spouse may be responsible for paying your credit card debt even if they weren't a joint account holder or authorized user.
The good news is that just because you live in a community property state, that doesn't automatically mean your spouse will have to pay your credit debt. The laws vary greatly by state.
For reference, the following have community property laws.
- New Mexico
- Alaska (Optional)
You will have to talk to a lawyer about your state's specific laws to see whether your spouse would be held responsible for debts.
What Else to Know About How Your Debts Are Paid After Death
There are a few other important things to know about how your debts are paid after you die, including your credit card debts.
Creditors May Not Have Access to All Assets
While your assets are used to pay off your debts, there are some situations when the creditor cannot access the assets. The most common example of this would be a life insurance policy with a family member as the beneficiary. Your beneficiary will always be paid before any debts are repaid.
That being said, your car, house, and jewelry are likely available to creditors. Every state has slightly different laws, and local courts frequently end up deciding if creditors can take a certain asset.
The Order Debt Is Paid
If your estate does not have enough assets to pay all of your debt, then there is a specific order that they get paid off. They are paid in the following order:
- Secured debt (car loans, mortgages, etc.)
- Lawyer and administrative fees
- Unsecured debt (credit cards)
It is worth noting that if you die with student loans, those may be forgiven or discharged when you die. This will depend on the loan and is more common for federal loans.
Deadlines for Creditors to Submit Claims
Every state also has a deadline by which creditors have to submit claims against your estate. If a creditor does not meet this deadline, your estate may not have to pay. Keep in mind that your executor has to notify creditors that you have passed. They can do so via direct communication or a published announcement.
The Fair Debt Collection Practices Act
This federal law prevents debt collectors from being abusive or deceptive. As such, it prevents debt collectors from hassling your family for unpaid debts that they are not responsible for. Thanks to this law, your family can request that debt collectors stop contacting them.
Keep reading: How Many Inches Is a Credit Card
Can You Avoid Your Assets Being Sold to Pay Your Credit Card Debt?
Technically, creating a living trust will not completely protect your assets from creditors. However, it dramatically increases their protection. For reference, with a living trust, the trust owns the assets. The trust also outlines how those assets are distributed.
One major advantage of a living trust is that it helps avoid the probate process. Probate can happen even if there is a trust, but it is much less likely. Having a trust also gives your heirs the chance to negotiate with your credit card issuers if necessary.
That being said, creditors may try to file probate claims or sue your estate for the credit card debt. But there are extreme costs associated with filing probate. This means that your creditors will likely be willing to negotiate with your lawyer or executor.
You can also protect your spouse with a joint tenancy with rights of survivorship. This has pros and cons, but it means that when you die, your joint owner has 100% ownership.
Help Your Heirs by Keeping Good Records
There is one key thing you can do to ensure that your credit cards, other debts, and assets are easy for your family to handle after your death. Keep good records. Even better, don't just keep good records, but talk to your family about them and your financial situation.
This will prepare them to handle your debt. It will also make it significantly easier for your executor to handle your estate. Most importantly, it prevents your spouse from being responsible for a debt they do not know about.
Your estate's assets are used to pay off your credit card debt after you die. If there aren't enough funds in your estate to do so, your heirs are usually not responsible for the debt. The exceptions are joint account holders or spouses in community property states.
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Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.