Almost 3 out of 4 consumers die in debt. Will your family members inherit your credit card debts?
Unfortunately, credit card debts do not disappear when you die. Your estate, which includes everything you own -- your car, home, bank accounts, investments, to name a few -- settles your debts using these assets.
The executor of your estate, the person who carries out your wishes, will use your assets to pay off your credit card debts. But when your credit card debts have depleted your assets, your heirs can be left with little or no inheritance.
If you are worried about loved ones being stuck with your debts after you die, make sure you understand your rights. You may even want to work with an estate planning attorney to help protect your assets.
Who Pays for Your Credit Card Debts After You Die?
When a family member dies, relatives typically won't have to pay off his or her credit card debts. But there are some exceptions.
A spouse or other family member might have to pay debts if he or she:
-- Jointly owned property or a business.
-- Lives in one of nine community property states, such as California, Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin.
-- Is required by state law to pay a debt, such as health care expenses, or to resolve the estate.
Authorized credit card users don't have to pay off the deceased's debts, unless one of the above conditions applies. With a joint account, the surviving cardholder must keep making on-time payments to avoid late fees and negative credit reporting.
A spouse with joint accounts could end up stumbling upon secret debt, which may cause financial distress.
"It becomes particularly problematic if one spouse has credit card debt, and the other spouse is unaware that they did that," says Lori Trawinski, director of banking and finance for AARP's Public Policy Institute.
If sorting out debts is causing strife, family members can check the deceased's credit reports. The spouse or executor of the estate may mail a request for a report to each of the three major credit-reporting companies: Equifax, Experian and TransUnion.
How Are Your Debts Paid After You Die?
The legal process of paying your debts and distributing what's left to your heirs is called probate.
Unless you have a living trust or make other arrangements, a probate court will determine your financial affairs after you die. In most states, an executor who is appointed by the court or named in a will is responsible for handling the final details of your estate.
Sometimes the probate process is straightforward, and other times it plays out in probate court over months or years.
One straightforward situation is when an unmarried person dies and has credit card debt but no assets. In that case, the creditor probably won't collect the debt, says Scott Schomer, CEO of Schomer Law Group, a Los Angeles-area firm that deals with estate planning.
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If a person has credit card debt as well as assets, the main question is whether the assets are available to the creditor, Schomer says. If the deceased had a life insurance policy, proceeds go to beneficiaries before debts are repaid. A life insurance policy is a contract with an insurance company, and in exchange for a premium, it provides a lump-sum payment to beneficiaries upon the insured's death.
If the deceased had assets, credit card debts and other debts, the executor has to abide by a basic rule, Schomer says: Beneficiaries can't take money without paying the bills. The first debt the estate has to pay is secured debt, such as the balance of a mortgage or car loan, he says.
Next, the estate usually pays administrative and lawyer fees, followed by unsecured debt, such as credit cards, Schomer says.
Creditors must submit any claims against the estate by the state's deadline. If that claim meets the deadline and the estate has sufficient assets, it must be paid.
If the estate pays piles of credit card debt, fewer assets could be left for heirs expecting an inheritance. But rules vary by state, and arrangements made before death will affect how much debt is paid back.
How Can You Avoid Probate?
The best way to avoid probate is to have a living trust because assets held in a trust will not be subject to probate. The trust will own the assets, and they will be distributed according to the instructions in the trust.
"There is no substitute for a good estate plan," Schomer says. "If you get your assets into a living trust, it doesn't offer creditor protection per se, but it does give you a lot more flexibility (than probate)."
The trust will allow your beneficiaries to save time and money they might otherwise spend in the probate process, Schomer says. Also, it allows them to negotiate with credit card companies if the deceased had outstanding debt.
Even when the family does not need to open a probate case to settle the estate, creditors might try to sue. An executor or a lawyer could try to negotiate the debts with creditors in these instances because they will have "huge upfront costs" for filing probate claims, Schomer says.
"It puts you in control rather than the court," he says.
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How Can You Prevent Passing Down Debt Problems?
People who want to avoid burdening family members with their financial affairs when they die can have an attorney draw up a will or trust. Estate planning can help by delineating where assets will go, saving loved ones time and money.
Keep in mind that even with well-laid plans, family members may still be hassled by creditors. Debt collectors sometimes contact family members, even though they know that relatives of the deceased often do not have to pay off accounts.
Fortunately, consumers are protected by the Fair Debt Collection Practices Act, a federal law that prohibits deceptive and abusive contact by debt collectors. Survivors can file a request to stop debt collectors from contacting them, but any debts still need to be addressed. Be sure your family members are well-informed of what is, and isn't, their responsibility to pay.
Keeping organized records is important as well. Family members should be able to quickly access your credit card accounts and look up balances.
"To the extent people can keep good records of that kind of information, it's very helpful to survivors," Trawinski says.
As much as you can, share information about debt with family members, including the extent of your debt.
"It's a difficult thing," Trawinski says. "People are very private about their finances. We hear a lot of stories about parents not informing their children about debt they have. We hear the same stories about spouses, and the other spouse is totally unaware the person had credit card debt."
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