Your unsecured (credit card) debt dies when you die (usually)

[JustCurious]

There is a lot of misinformation and misconceptions on this topic, and I thought I would help to dispel some of it here. This comes up when someone dies with credit card debt and the credit card company then lies to family members by telling them that they are responsible, and they have to sell other assets, etc., in order to satisfy the credit card debt. However, in most cases, this is simply false, and the credit card companies know it, but they lie shamelessly and feed into the common misconceptions that people have.

First of all, let me clarify the situations I am talking about. I am talking about situations where someone has unsecured (credit card) debt in their own name, and ONLY in their own name. No joint accounts. If there is a joint account, then the credit card CAN go after the joint account holder.

Second, IF the person is survived by a spouse AND they lived in a community property state, then the spouse MAY be responsible for the unsecured debt. However, most states are not community property states, and in those cases, the credit card company has no claim against the spouse (remember the first rule above, the account cannot be a joint account). Also, if there is no surving spouse, then it doesn't matter if you are in a community property state.

With the two caveats above, it is absolutely true that when you die, your credit card debt dies with you, and no one else is liable for those debts.

Now, you say, what if the person had assets? Well, the credit card company would only have a claim against assets that pass THROUGH PROBATE. In most cases, assets pass outside of probate. The most common examples are bank accounts or other accounts with beneficiary designations. Those accounts pass to their beneficiaries without going through probate. Therefore, no unsecured creditor has any claim against them whatsoever. Unsecured creditors only have claims aganst assets that pass through probate. But since most people don't (or shouldn't) have a need for probate, then in most cases, unsecured creditors have no claim against anything.

 

[Anansi]

I realize it is difficult to discuss ethics and credit card companies at the same time, but if there is enough money in the estate to pay the credit card company, that still seems the right thing to do regardless of the whether or not the estate is legally obligated to do so.

 

[JustCurious]

The credit card companies don't contact the family members and say "You are not legally obligated to pay, but we think you are ethically obligated to pay..."

Credit card companies know full well what unsecured credit means, and they know that they usually don't have a valid claim after the cardholder dies. In other words, they knew the risk, and that is part of the reason why they charge such high interest rates and high fees. In my opinion, there is nothing unethical about following the legal rules that the credit card companies knew about when they agreed to provide unsecured credit in the first place. These laws may be a surprise to you, but the credit card companies know all about them.

 

[Anansi]

They question isn't whether or not credit card companies are ethical, it is whether or not you are. Just because they are low life lying scum doesn't mean that if you agree to take their money and pay them back you shouldn't do that. Personally, I would pay my debt...or I would expect whoever handles my estate to do so.

This is also different from the more complex question of what is legal which you have addressed in detail. That is certainly important, but, again, there is an enormous difference between what is legal or illegal and what is reasonable and fair.

 

[JustCurious]

In my opinion, it is reasonable and fair and ethical to follow the law regarding whether your family members are obligated to pay a credit card company to satisfy debt that you incurred before you died.

 

[JustCurious]

Just because they are low life lying scum doesn't mean that if you agree to take their money and pay them back you shouldn't do that.

The issue is not whether YOU should pay back money that you borrowed, the issue is whether SOMEONE ELSE should pay it back after you die.

If your answer is yes, would it matter if you had no money when you died? Would you expect your family members to pay it back anyway? If your answer is then no, what difference does that make? If you borrowed money, and you had no money to pay it back, does that remove your ethical obligation to repay it? If not, then why does it remove your family's ethical obligation after you die? You should at least be consistent.

 

[jazz4cash]

if there is enough money in the estate to pay the credit card company, that still seems the right thing to do regardless of the whether or not the estate is legally obligated to do so.

Good point..........When my siblings and i went through this, it was not clear what was required, but we all KNEW our mom would want her debts paid, so it was an easy decision.

 

[Fireup2020]

Not to be flip, but this means we should advise our elderly grandparents/parents to run up their individual credit cards (cash advances, gifts, etc?) - and NO ONE is required to pay this off upon death of the card holder?

 

[FinanceDude]

The issue is not whether YOU should pay back money that you borrowed, the issue is whether SOMEONE ELSE should pay it back after you die.

If your answer is yes, would it matter if you had no money when you died? Would you expect your family members to pay it back anyway? If your answer is then no, what difference does that make? If you borrowed money, and you had no money to pay it back, does that remove your ethical obligation to repay it? If not, then why does it remove your family's ethical obligation after you die? You should at least be consistent.

Since I am LIVING this as we speak, I will comment:

My sister owes MORE than the amount her estate is worth. Do I feel obligated to pay back her debts? Yes, as I am an ethical person. However, do I like the way the CC companies treat me, using various forms of harassment, cajolement, threatening, etc to collect those funds? NO!! Keep in mind, this is my SISTER's assets, not my WIFE'S!!!

So I have become a little bitter with all CC companies, the ones who keep calling and asking when they can expect payments, etc.....the ones that keep calling and asking for my sister when I sent them death certificates 5 months ago...........those lovely folks that called me on X-mas Eve and asked for her..........those "nice folks"..........

So, part of my ethical self says screw them, I hope they get nothing..........

 

[JustCurious]

Not to be flip, but this means we should advise our elderly grandparents/parents to run up their individual credit cards (cash advances, gifts, etc?) - and NO ONE is required to pay this off upon death of the card holder?

If you read my caveats above, and if they don't have any significant assets to pass through probate, then yes, that would be good financial advice.

 

[Texas Proud]

Unless you are like FinanceDude and the estate is less than the debt.... you should pay it off...

Now, a lot of wills are written that REQUIRE you to pay it from the Estate... common language is to pay off all debts... that includes CC debt..

As for FinanceDude, I would not pay them anything more than legally required... they knew the risks.... and as you can see, they are low life scum suckers with high fees and would screw you in a heartbeat... but then again.... I get a dividend on that money...

 

[JustCurious]

Texas, when you say "the estate" you need to clarify that for those who don't understand. You mean "the probate estate".

Someone could have millions of dollars in bank accounts or retirement accounts or insurance policies, and that would not be a part of the probate estate because it would pass to the named beneficiaries outside of probate, and the credit card companies would have no claim on these assets. So I agree that if you have significant assets in the "probate estate," you should pay the credit card debts out of the assets in the probate estate. But most people simply don't have any significant probate assets, and the terms of the will don't mean very much.

 

[jdw_fire]

So would you also recommend that everyone put all their assets into a living trust as that doesn't go through probate, and then everyone can run up large CCbills that won't be paid when they die?

 

[JustCurious]

jdw: There is a lot of misconception about this topic. Let me try to explain further. Here is what most people think happens when you die:

All of your assets get put into a pile which becomes your "estate", and then all of your debts get added up, and the debts must be paid out of your "estate", and what is left over goes to the beneficiaries of your "estate."

THIS IS FALSE.

Here is what really happens when you die:

Most of your assets pass outside of probate, and no "estate" is every created (ie, there is no probate proceeding in court). For example, most people have bank accounts or brokerage accounts or insurance policies which have beneficiary designations. Those assets pass directly to the named beneficiaries without any "estate" (ie probate estate) ever being set up in court because they pass to the beneficiaries outside of probate, and it doesn't matter if an estate is set up because they pass regardless of what the will says. As far as a home, if you are married, most people have it set up in joint name, and the same thing happens...the home passes to the survivor without any court involvement. And for those assets that pass outside of probate, no unsecured creditor has any claim against them whatsoever. Unsecured creditors only have a claim against PROBATE assets. You must understand this distinction. You could owe $1 million dollars in unsecured debt, and it would have no effect on all of your non-probate assets being passed to the named beneficiaries.

So you see, for most people, there is no need to set up a probate estate for most of the assets to pass. Therefore, there is no need for any fancy trust to be set up to avoid probate. For most people (despite the misleading press reports to the contrary) a will is unecessary. For most people, the only assets that need to be probated are furniture and the odd coin collection that grandpa kept under the bed, but for most people those assets are not worth fighting over.

 

[haha]

Just Curious, I very much appreciate this information. My ethics extend to individuals who would at least possibly have similar ethics toward me. However, since I know CC companies, universities, hospitals, etc. would happily render the decedent’s carcass and sell the grease, I would have ZERO problem about telling them to get stuffed in the situation you describe.

Score one for the home team!

Ha

 

[Bikerdude]

Credit card companies know full well what unsecured credit means, and they know that they usually don't have a valid claim after the cardholder dies. In other words, they knew the risk, and that is part of the reason why they charge such high interest rates and high fees.

I tend to agree with this. It's baked in the cake, they are just fishing for suckers.

When you buy an "unsecured" bond from a company and they go bankrupt no one knocks on your door and says "we feel obligated to pay their debts". But you knew that risk when you bought the bond and were paid a premium for it.

 

[Peter]

So you see, for most people, there is no need to set up a probate estate for most of the assets to pass. Therefore, there is no need for any fancy trust to be set up to avoid probate.

Well, let's see, my Fidelity brokerage account (not IRA or 401K) doesn't have any beneficiary designation, and unless I'm mistaken, no provision for one.

Then, since I'm single/widowed, there's no joint owner for my house.

Maybe I'm not 'most people'? But I would think that many on this board would have substantial assets that would be part of the probate estate, in which case a trust would be a good idea.

Or am I missing something here?

Peter

 

[JustCurious]

Well, let's see, my Fidelity brokerage account (not IRA or 401K) doesn't have any beneficiary designation, and unless I'm mistaken, no provision for one.

Then, since I'm single/widowed, there's no joint owner for my house.

Maybe I'm not 'most people'? But I would think that many on this board would have substantial assets that would be part of the probate estate, in which case a trust would be a good idea.

Or am I missing something here?

Peter

You are mistaken about your brokerage account, you can designate a beneficiary, and you should.

Regarding your house, there are a number of ways you can set up the title so it passes to your designated beneficiary... you can grant them a remainder interest, you can add them as a joint tenant with right of survivorship, or you can transfer the property to a trust and name them as a beneficiary of the trust.

 

[donheff]

I am on JustCurious' side in this ethics debate. Think about it this way. The old codger left $100,000 to <insert name> Church and $10,000 to <insert name> Long-Suffering-Son, all without probate. He also left $10,000 in unsecured CC debt.

Would the church pay the CC debt if not legally obligated to do so? I don't think so. In fact, I would be so shocked if they did, I would be tempted to convert. So, the church has declined - should the son pick up the tab? Hell no, take your cue from the church.

The CC companies know full well what they are doing and build in losses of this sort. On the other hand, if the old codger had a personal debt to a friend, I would feel obliged to cover it. But I bet the church wouldn't. They would say, "the money now belongs to God, just like poor, dear old codger, you no longer have a claim to it."

 

[simple girl]

Good point..........When my siblings and i went through this, it was not clear what was required, but we all KNEW our mom would want her debts paid, so it was an easy decision.

Same here. I knew my Mom would also want all of her bills paid, if possible.

 

[Peter]

Curious, thanks for the clarification.

I see that you wrote:

you can transfer the property to a trust

Umm, exactly, that is what I did several years ago. So trusts do have a place, I think.

Peter

 

[simple girl]

Since I am LIVING this as we speak, I will comment:

My sister owes MORE than the amount her estate is worth. Do I feel obligated to pay back her debts? Yes, as I am an ethical person. However, do I like the way the CC companies treat me, using various forms of harassment, cajolement, threatening, etc to collect those funds? NO!! Keep in mind, this is my SISTER's assets, not my WIFE'S!!!

So I have become a little bitter with all CC companies, the ones who keep calling and asking when they can expect payments, etc.....the ones that keep calling and asking for my sister when I sent them death certificates 5 months ago...........those lovely folks that called me on X-mas Eve and asked for her..........those "nice folks"..........

So, part of my ethical self says screw them, I hope they get nothing..........

That is just horrible. In this case I would not be paying them their $.

I can't imagine the trauma this causes you. I thought it was bad enough that I'd get cigarette coupons in the mail for my Mom (she had emphysema).

Ever consider changing your number?

 

[WM]

Here's another wrinkle, which could use some clarification.

My FIL passed away with substantial CC debt, and was the primary accountholder on all the cards.

My MIL was an authorized user on said cards. They show up on her credit report.

The original agreements on the cards don't mention authorized users being liable, only the primary accountholder. Ethics aside, is she still not liable?

Second question, if she's not liable and doesn't pay them off, what's going to happen to her credit? Does that hurt her as an authorized user on the accounts?

 

[Goonie]

Just Curious, I very much appreciate this information. My ethics extend to individuals who would at least possibly have similar ethics toward me. However, since I know CC companies, universities, hospitals, etc. would happily render the decedent’s carcass and sell the grease, I would have ZERO problem about telling them to get stuffed in the situation you describe.

Score one for the home team!

Ha

I agree! The CC companies know the risks involved with making unsecured loans....just like us investing.....sometimes ya win...sometimes ya lose....the fees (interest) they charge make up for their 'losses'. IMHO

Personally, when I kick the bucket....I don't give a rat's *ss whether any possible outstanding bills get paid!!! I do have ethics, but it's really hard to use 'ethics' and 'CC company' in the same sentence.

Several years ago I read the book "Die Broke", and the one statement I really liked in it was to the effect of, "The last check that you right should be to the undertaker......and it should bounce due to lack of funds"

 

[JustCurious]

Here's another wrinkle, which could use some clarification.

My FIL passed away with substantial CC debt, and was the primary accountholder on all the cards.

My MIL was an authorized user on said cards. They show up on her credit report.

The original agreements on the cards don't mention authorized users being liable, only the primary accountholder. Ethics aside, is she still not liable?

Second question, if she's not liable and doesn't pay them off, what's going to happen to her credit? Does that hurt her as an authorized user on the accounts?

1. She is not liable.

2. Nothing should happen. She did not agree to be responsible for the debts, therefore, they should not report her as being delinquent.