What happens to my credit card debt when I die?
Consider the old adage that states, there are only two things certain in this life, death and taxes. Death and taxes, what a peculiar combination. As reported on the website debt.org, a survey in 2016 concluded that nearly 73% of all Americas would die in debt. But what does this mean or how does this apply to a person’s credit card debt when they pass on to the great beyond? I would think that death, being the final release, would relieve a person from their earthly obligations and responsibilities. Wouldn’t it? Let’s explore that in a little more depth and find out together.
According to the website, The Balance, when a person dies, the debt that they have accumulated during their lifetime passes onto their estate, which will then settle that outstanding debt. This debt can include such things as credit cards, car loans, and/or mortgages just to name a few. So what is an estate? What does that mean? Great questions! Keep on reading because the next section deals with those very questions.
What is my estate?
When most people hear the word ‘estate’, they instantly get a mental image of a grand house surrounded by sprawling green lawns, a large swimming pool, on a very large parcel of land. And true, that is one meaning of the word; however, that is not what we are discussing here.
As reported by the website Investopedia, “an estate is everything comprising the net worth of an individual, including all land and real estate, possessions, financial securities, cash, and other assets that the individual owns or has a controlling interest in.”
Most people will only consider the big-ticket items, as mentioned earlier, when visualizing an estate; however, it is not limited to just those items. A person’s estate can truly comprise of anything at all of value. Things such as works of art, a stamp collection, collectible plates, or jewelry, as mentioned over at debt.org, to name a few more, less commonly thought of items as making up a person’s estate.
Who is responsible for paying my debts after death?
The unfortunate reality being, is that death does not resolve you of your financial obligations. When you die, someone will be responsible for clearing the debt you had accumulated at the time of your passing. The responsibility of taking care of your remaining debts falls to your estate and more specifically the executor (or executrix if the person is female) of your estate. The executor (or executrix), as defined by the website Investopedia, is “an individual appointed to administer the estate of a deceased person… whose main duty is to carry out the instructions to manage the affairs and wishes of the deceased person’s estate.”
Bear in mind, though, that not all assets may be sold to pay off a decedent’s debt. The website debt.org reports that assets are broken down into two classifications, exempt and non-exempt. This means, legally, that items classified as exempt cannot be sold to cover any lingering debt. Obviously, each State classifies what is on the exempt and non-exempt list differently, save two very distinct matters. Every State considers life insurance policies and retirement savings as exempt. This naturally leads to the question then of who actually pays for the deceased’s debt.
In most situations, that is the executor’s (executrix’s) job. Additionally, in most cases, relatives are not responsible for the late individual’s debt apart from some very specific circumstances. The U.S. News website lists the follow scenarios as to when a relative may still be responsible for a deceased relative’s debt. Those scenarios include if the relative(s) have co-signed for a credit card or loan, owned a business or property jointly, if they live in any of the nine community property states, or is required by state law.
What types of debt will my estate pay?
There are plenty types of debts that can be considered for collection after a person dies. As reported on the website, The Balance, these debts are placed in a priority order. Some of the types of debts that are set to be settled after a debt include loans, such as, car, home, student, and personal. This can include debts that have co-signers as well. So where does credit card debt rank on that priority list? Honestly, credit card debt ranks pretty low as to priority, which could account for why those types of debt routinely get sold to third-party collection agencies.
How should I plan for settling my debt when I die?
There are many options available to one who is wanting to make sure that any unsettle debt is taken care of in the event of their demise. The first thing to do is to make sure that an up-to-date and accurate will is drawn up. A will is a legal document outlining the decedent’s wishes as to the handling and dispersion of their estate. It not only outlines which relatives get which assets; it also outlines how any unsettle debt is to be resolved. Then the executor (or executrix) deals with any creditors or entities looking for payment.
Another common way is to have some type of life insurance product purchased by the deceased, while living, that can be used to settle many of their final expenses. Remember all assets that you have put in place to resolve your final debts are classified as exempt or non-exempt. As you will remember assets classified as exempt (life insurance policies) cannot be used to pay off creditors in most cases. Hopefully, the will or, at least, the deceased’s final wishes will be followed through by having the beneficiaries use the policies benefit to pay off certain final expenses such as funeral costs and whatnot.
What happens if debt collectors contact my survivors?
As much as we would like this process of settling an estate to be straightforward, often times, it is not. In fact, it can be, and usually is, downright confusing and frustrating. Part of the frustration and confusion arises from the question of what happens when the estate does not have enough value or assets to cover the decedent’s debts. Who is on the hook for the bill when creditors come knocking?
As stated before, the estate and executor (executrix) are responsible for dealing with creditors and paying off the decedent’s debt. There are some situations where other people may still be liable, such as a co-signor on a mortgage or credit card. But what if you are not a co-signor to any of the debt and bill collectors start contacting you regardless?
According to the website debt.org, creditors have a specific time-frame to make a claim to an estate so as to get paid. This time-frame is determined by each state separately. Unfortunately, like other situations where debt collectors are involved, they will try to get the money, many times regardless of whether you owe it or not. Just remember, that the Fair Debt Collections Practices Act afford the surviving relatives or the executor (executrix) of the estate the same protections as individual consumer. Don’t be afraid to exercise your rights if you are being harassed.