What Happens to Credit Card Debt When You Die with No Estate?

The only way your credit card debt will magically disappear after you die is if you pass away with no assets at all.

Or if the assets you leave behind aren’t enough to cover everything else you owe.

The credit card companies don’t want that, but your beneficiaries don’t, either. They probably won’t have to pay off your credit card debt, but it’s a darn good bet they’d prefer something positive in the way of an inheritance.

That’s a good reason to keep those balances under control, don’t you think?

Credit Card Debt and Estate Law

Estate law regulates how your assets are distributed after your death. That includes distributions both to your beneficiaries and to your creditors. The nuances of those distributions differ from state to state, so it’s helpful to know exactly how your state handles them as you think about your estate planning.

Your estate will be responsible for debts, meaning the money you owe will be paid back from the value of holdings such as your real estate, your bank and investment accounts, your personal property like cars and jewelry, your business interests, and other items that might be of worth.

Estate law doesn’t apply just to credit card debt. It applies to nearly every debt you owed before you died, and it prioritizes your debts so that certain kinds of creditors get paid from the estate before others. Unsecured debts such as outstanding credit card balances are a relatively low priority in estate law, which is why a deceased person’s credit card debt can go unpaid when there is no estate or a limited estate.

How Does the Estate Pay Debt?

The legal process is called probate, and it can be a complicated, time-consuming affair. The distribution of debt payments (as well as of inheritance allotments) is managed by the person you name as executor in your will, or – if you didn’t create a will or name an executor – by someone the court appoints to administer your estate.

Whoever handles it must pay off your outstanding debts before what’s left of your assets can go to your heirs. Those early payments to creditors come first out of whatever cash you left behind. If the cash doesn’t cover all your debts, then the sale of your assets begins. Generally, the top-priority debts that get paid out of your estate include money you owe to the government followed by the remaining balances on secured debts such as a home mortgage or an auto loan, along with costs associated with your funeral.

As we mentioned earlier, your credit card debt is near the bottom of the repayment hierarchy, but it nonetheless has a higher priority during the probate process than the distribution of any assets to your beneficiaries.

What If There Is No Estate?

Your credit card debt (as well as your other debts) likely will go unpaid after your death if you leave behind no estate. Bottom line: That debt won’t be passed on to your survivors.

Because credit card debts are unsecured loans, the card company will have to write off the loss. That’s true, too, when the estate you leave behind has some value but not enough to reimburse the credit card companies after the higher-priority creditors get what’s owed to them.

How Does Credit Card Debt Affect Beneficiaries?

As you might guess, estate law isn’t as simple as we’ve made it out to be so far. It’s true that your heirs will not inherit debt from a credit card account you held singularly, but there are some situations in which the people you leave behind can be held responsible for your debt once you’re gone.

If, for example, someone is a joint account holder or a co-signer with you on a credit card that isn’t paid off before you die, the creditor considers that person to be the account’s owner after your death and he or she will be obligated to pay the balance. And if your beneficiary is your spouse who lives in a community property state, he or she could be liable for your credit card debt. There are nine such states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Steps to Take When a Cardholder Dies

You’re still alive, right? That’s why we’ve been addressing your credit card debt and what happens to it after you die. But even if your beneficiaries don’t inherit it, the story about your debt after death might not end when you pass. So, let’s finish with some advice for them, because if they aren’t careful, they could face some unpleasant issues about your finances after you’re gone.

For example, your identity could be co-opted by people trying to open new accounts in your name, or thieves could try to steal from your accounts that don’t get closed after your death.

Here, then, are the moves they should make on your behalf to protect against those sorts of headaches.

• Organize the deceased’s financial documents. Especially if you are the executor of the estate, you’ll need to know exactly what accounts he or she was carrying. You can usually find that information by requesting a copy of his or her credit report.
• Get copies of the death certificate. Request more than one, because you’ll need to send official copies of it to the credit card companies and other stakeholders in the estate to close out accounts. (You’ll need one to get the credit report of the deceased, too.) You can usually get copies of the death certificate from your state’s Department of Health or Vital Records, or from the funeral director who administered the burial.
• Stop anyone from using the deceased’s credit cards. As soon as he or she dies, the cards are no longer valid. Using them constitutes credit card fraud.
• Officially notify the credit card companies. Request cancellation of the accounts. Do it by phone as soon as possible, then send the death certificate copy and whatever other documentation the company requests by certified mail as the next step.
• Request a credit freeze from the credit bureaus. Contact all three (Experian, Equifax, and TransUnion) to make sure no one can open any new credit accounts in the deceased’s name.

One final piece of advice for beneficiaries and other survivors after the death of a relative: Be aware that you might hear from debt collectors even if you aren’t responsible for paying any of the debts your loved one left behind. Know your rights. Know your state’s protocol for administering the estate. And know that some debt collectors aren’t above trying to game that system while you are grieving your loss.