Who Pays Credit Card Debt when Someone Dies?

The estate is responsible to pay credit card debt after someone dies, but planning for that debt will protect the survivors.

Credit card debt worries create sleepless nights for many. Will a surviving spouse or family members be burdened with the debt? A recent article titled “Here’s what happens to your credit card debt when you die” from CNBC explains how post-mortem credit card debt works.

The estate administration occurs after someone dies. Part of that process is “marshaling” the assets, which means to identify and gather the assets of the person who passed.  Once that is done, there is a hierarchy of who gets the money, which is generally creditors and then the beneficiaries, and there are degrees of creditors that determine who get paid first among them.

Credit card debt is “unsecured” debt, meaning it isn’t linked to any kind of collateral, like a car or a house, and it is usually paid with the last in line creditors.  However, it is important to note that it is only the decedent’s money in the estate that is used to pay the credit card debt.

Assets used to pay off the debt might include cash, or property with cash value. Certain types of accounts, including retirement or tax-deferred accounts,  and life insurance payouts, might be shielded from this process.  Other types of accounts might not be owned by the estate at all, in which case they would by pass the process.  Laws vary by state, so an estate planning attorney who practices in the state where the decedent lived will be the best source to address this issue.

Is the surviving spouse responsible for credit card debt?

If the person has no assets, then loved ones won’t be responsible for the debt. However, if someone is a joint account owner on the credit card, then in certain states, the surviving owner may be responsible for the simple fact it is their debt too. Authorized users are generally not held responsible for the deceased’s unpaid balances.

I would say however that you always want to make clear to the company what your role and relationship is to the card account owner if you are an account owner.  One of the first cases of my career involved a gentlemen who thought he had to pay his mother’s credit card after she died.  He helped her pay it while she was alive despite not being on the card.  The credit card company received so many checks from him that they changed the name on the account to his name.  We ultimately resolved it, but this type of confusion made things more difficult than necessary.

It is also important to note that heirs may not be legally responsible for paying the credit card debt, but all debt must be settled before loved ones can receive their inheritance. Workarounds, if possible, need to be done in advance of the person’s death in the estate planning process.  Further, if the credit card isn’t satisfied, credit card companies will issue 1099’s to the estate for cancellation of debt.  This potentially creates income in the estate which may generate tax consequences to the beneficiaries, but that requires a far more involved analysis.

Estate laws differ by state, but any joint account holders on credit cards need to be aware of the debt and have a plan for when one of the owners dies. If paying off the debt is not possible, perhaps one of the joint owners may seek to remove themselves from the credit card, if the other person was responsible for creating the debt.

A frank discussion about the debt and how to manage it is definitely in order. One solution may be to purchase a life insurance policy and have the proceeds go to the person who will be effected by the debt, such as the surviving spouse. A term policy might be a manageable way to do this, especially if both people depend on two incomes to manage their bills.  You can also see here for another discussion on estate debt that goes through the order of creditors a bit more fully.  https://www.galliganmanning.com/do-i-have-to-pay-the-estates-debt/

This won’t be the most pleasant discussion with a financial partner, but is necessary, along with planning for incapacity. Perhaps the best thing that can come out of the credit card problem, is a decision to have an estate plan created that includes addressing the debt and preparing for the future.

Reference: CNBC (Nov. 21, 2020) “Here’s what happens to your credit card debt when you die”