Who Is Responsible for My Debt When I Die?

debt-after-death

Debt is persistent. In many cases, not even death can erase it, and you can rest assured your creditors will attempt to collect what you owe when you pass away. You may be worried that, upon your death, your outstanding debt could negatively affect your loved ones.

The parties responsible for your debt depend on where you live and what types of debt you hold. Usually, either your estate (your total assets at the time of your death) or your loved ones will assume responsibility.

When Your Estate Is Responsible

If you’re worried about passing your debt onto your loved ones, there is some good news: In most cases, they won’t have to dip into their own pockets to repay what you owed. When you took out a loan or opened a credit card, the responsibility to pay became yours, and that obligation can’t be extended to your loved ones (unless you live in a community property state — we’ll get to that soon).

But that doesn’t mean the debt is wiped clean. Your loans, credit card debts and even Medicaid long-term care costs must be settled. Your estate will enter the probate process, in which the executor of your estate pays off your debts and distributes what is left over, according to the directions left in your will (or state law, if you don’t have a will). This is a good reason why families may not want to start splitting up possessions before the probate process is completely executed.

If there isn’t enough money in your estate to cover your debts, your remaining debt is usually wiped clean, but you’ll want to check with your local authorities before making any assumptions.

When Your Loved Ones Are Responsible

In some cases, your loved ones could be liable for your debts. Co-signers and co-borrowers aren’t off the hook for debt they share with you if you pass away. That means any credit cards or loans you officially share with another person will become that person’s responsibility (authorized users don’t count).

Mortgages are a different matter. Joint owners and heirs don’t have to pay off a mortgage immediately. If you leave behind a spouse, or leave your home to a relative, that person can usually take over the payments. Alternatively, they can sell the home to cover the mortgage and any home equity debts.

Community property states place additional burdens on spouses. If you are married and live in one of the community property states – such as California, Texas or New Mexico – assets and debts acquired after your marriage are shared. For instance, if you opened a credit card in your name after getting married, your spouse may still be responsible for that debt in a community property state.

Some Exceptions

Both your estate and your relatives are safe from having to repay your federal student loan debts, which are completely forgiven when you die. (Note: This is not the case for private student loans.) Also, in most states, your retirement accounts or life insurance payouts are safe from creditors and go directly to the beneficiaries outlined in your will.

Laws vary from state to state, and can get pretty complicated if there are several different types of debt or many beneficiaries to an estate. To help reduce the obligations left to your loved ones after your death, you may want to hire a lawyer, create a will and appoint an executor of your estate. This way, you can declare your intentions for your estate and reduce the chance of legal or financial complications in the event of your death.

[Editor’s Note: You can keep an eye on how your debts are affecting your credit by viewing two of your credit scores, updated every 14 days, on Credit.com.]

Image: Pali Rao

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My Father Passed Away. Can I Use His Credit Card Now?

inherit a credit card

Unless you’ve co-signed, you generally can’t be held liable for a loved ones’ outstanding balance when they pass away. But can you inherit a good line of credit? One Credit.com blog commenter recently wrote to us, asking if a sibling can take over their deceased father’s credit card:

“My father passed some months ago with zero debt on a card, but he had a high amount of available credit. Can the executor of his estate, my sibling, ask the issuer to take over his card?”

The Perks of a High Credit Limit

It makes sense that the sibling would want this credit card with a high limit: It could improve her score. Credit scoring models consider your credit utilization rate — that is, how much debt you owe versus credit at your disposal — when calculating your score. Generally, you want to keep this rate below 30% (and ideally less than 10%) — and a card with no balance and a high limit can help you do that.

Unfortunately, banks and credit card issuers aren’t in the habit of transferring accounts to heirs. “Credit card accounts are non-transferable,” Nessa Feddis, senior vice president at the American Bankers Association, says. “People have to qualify for a credit card.”

The one in question was issued based on the father’s ability to repay his debt, so unless the sibling initially co-signed the contract (which it doesn’t appear she did), an account transfer would be a no-go.

The siblings could contact the issuer — as they should since executors must provide notice of a borrower’s death to creditors. But in order to open a similar account, the potential borrower would need to demonstrate her own creditworthiness. In order words, she’d need to apply for her own account and get approval, with terms and conditions being contingent upon her income and credit score. The father’s account would likely be closed, so no one should use the card in the meantime. Executors “have the obligation to pay any outstanding balance from the estate,” Feddis adds. “They must discontinue using the card.”

Building Your Credit 

Not all credit cards are created equal, and spending habits generally dictate which card is best. It’s always a good idea to do some research before applying for one, whatever your motivation. Also be sure to check your credit so you have a better idea of whether you’ll be approved. (Most credit card applications generate a hard inquiry on your credit report, which can ding your score. You can pull your free annual credit reports at AnnualCreditReport.com and see your credit scores for free each month on Credit.com without hurting your scores.)

If you or a family member wants to improve your credit utilization rate, you could work to pay down some balances. Or just ask for a higher limit on a card that’s already in your wallet (though this may require a credit pull as well).

More on Credit Reports & Credit Scores:

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