Who inherits credit card debt?

Laughter and joy make you more creative and productive, so don’t take your work so seriously and you’ll probably do it better.  – Loretta LaRoche in Squeeze The Day

Years ago, a client came in whose wife had mild cognitive impairment.  He could not effectively reason with her nor discuss matters sensibly.  His main concern was the amount of credit card debt she was piling up, much of which was to aid and support their unfortunately n’er do well grandson.  The long, long story that goes with those facts is not the focus of today’s column and must be saved for another day.

            Here is the focus:  The gentleman asked me “If I am still living when my wife dies, will I be responsible for these escalating credit card bills?”  This is a common question.  Adult children often have a feeling, or a sense, that they are morally responsible for debts accumulated by their deceased parents.

Sorting out the difference between a moral obligation and a legal one is also a subject for another day.  For now, the question is “Who inherits credit card debt?”

When a person dies, his or her credit card debt is not automatically wiped out, as many believe.  Whether the credit card company can recover its debt depends largely on three things:  1) state law, 2) the amount of property in the decedent’s estate and 3) if anyone else cosigned the obligation.

Maybe this is a good place to begin – if the card was the wife’s alone, with no joint account holders, the debt is also the wife’s alone.  At her death, her estate is responsible for paying off the balance.  If her estate goes through probate, her named personal representative will look at her assets and debts and, guided by law, will determine in what order bills should be paid.  If there are any assets remaining after debt payments, they will be distributed to heirs by following her will (if she had one) or state law (if she didn’t.)

If the debts amount to more than the assets, the credit card company frequently loses, and must “write off” the debt.  Creditors are notified that the estate is insolvent, and often that’s the end of the matter.  A card company cannot legally force someone else to pay.

The Credit Card Act of 2009 requires, among other things, that credit card issuers stop tacking on fees and penalties once they are notified that a card holder has died.  In addition, the Fair Debt Collection Practices Act sets up guidelines creditors must use in contacting debtors, or possible debtors, regarding a debt.   It seeks to prevent creditors from using “abusive, unfair or deceptive” practices to collect a debt.  Unfortunately, after a death, many collection companies attempt to make family members feel responsible for the debt, even though they are not.

When a person obtains a credit card, he or she is responsible to pay that debt back because of a contractual obligation. A contract is signed between the credit card company and the consumer debtor.  A deceased person’s family, friends or heirs do not inherit his or her debts.  As a result, they are typically not liable or obligated to pay the debt back with their personal assets unless they were jointly liable on the obligation to begin with.  Maryland is not a community property state, but be aware that such states often have different ways of handling this situation than the rules I’m describing today.

What does it mean to be “jointly liable on the obligation to begin with?”  If a spouse, family member or business partner signed the card application as a co-signer (joint account holder), then that person will be held liable for the balance on that card, along with or instead of the estate.

If that second cardholder is merely an authorized user (didn’t sign the application, isn’t liable for bills, and merely has charging privileges) then he or she isn’t responsible.

Remember that not all assets go through probate.  Some items, such as IRAs, 401(k)s, brokerage accounts and insurance typically go directly to beneficiaries named in the controlling document.  In most cases, these assets are not considered part of the estate.  Since the assets do not go through probate, the personal representative cannot use them to pay estate bills.

There is a specific time period for creditors to file a claim against the estate.  InMarylandit is six months from the date of death. If a creditor has not filed a claim within that time period, he is barred from filing later.  When an estate is probated, creditors are prioritized.  Credit card debt is unsecured, unlike a mortgage which is secured by the property, or a car loan that is secured by the vehicle.  So, most likely, the credit card company will be at the back of the line when it comes to paying debts from the estate.

That doesn’t mean the credit card companies and collection agencies won’t try to recoup the debt from family members, so don’t fall for it if you know you’re not liable.  Before any debts are paid out of an estate, including credit card debt, it is a good idea to double-check with your attorney.

Thank you for reading.  Stay well.  See you next week.