the state, terms dictate who owes, who must be paid
by Dana
Dratch June 27, 2016
Summary
When someone dies with credit card debt,
state laws and the original contract terms dictate who owes, and what must be
paid
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You can’t take it
with you, but do credit card bills follow you into the grave? Does that debt
die with you? Or can it come back to haunt those left behind?
There’s no
one-size-fits-all answer. A number of factors, including where you live and who
applied for the card, can radically alter the situation.
Here’s the simple
part: If the card was yours alone, with no joint account holders, the debt is
yours alone, too.
When you die, your
estate is responsible for paying off the balance. If the estate goes through
probate, your administrator or executor will look at your assets and debts and,
guided by law, determine in what order bills should be paid. Remaining assets
will be distributed to heirs by following your will (if you have one), or state
law (if you don’t).
Sometimes,
the credit card company loses
If the assets don’t
cover the bills? “If there isn’t enough money, credit card companies would have
to, as my students say, ‘suck it up,’ ” says Doug Rendleman, law professor at
Washington and Lee University.
Creditors are
notified that the estate is insolvent. They write off the bills, and often
that’s the end of it. Children, friends, or relatives can’t inherit debt. A
card company can’t legally force someone else to pay.
The most critical
question in whether the living still bear responsibility for a dead person’s
debt is: Was the account individual, or shared? 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.
Changes
in rules of engagement
Two changes in
federal law have altered the rules of engagement for collection after death:
·
If
there is enough money, the Credit CARD Act of 2009 requires the executor of an
estate to be informed of the amount quickly, and requires credit
card issuers to stop tacking on fees and penalties during the time the estate
is being settled. That portion of the law went into effect in February 2010.
·
The
Federal Trade Commission in July 2011 issued a series of guidelines for debt collection
from decedents’ friends and relatives. The rules represent the FTC’s
effort to find a middle ground allowing legitimate collection activity while
reining in overaggressive tactics.
Community
property complications
The question of who
can inherit debt “gets a little more complicated in community property states,”
says Michael R. Kerr, senior manager of U.S. government affairs at Enova
International. Generally, assets accumulated during a marriage are considered
joint property in community property states. But, in some cases, so are debts.
State
that employ community property law
·
Alaska
(opt-in)
·
Arizona
·
California
·
Idaho
·
Louisiana
·
Nevada
·
New
Mexico
·
Texas
·
Washington
·
Wisconsin
States that employ
community property laws: Arizona, California, Idaho, Louisiana, Nevada, New
Mexico, Texas, Washington, and Wisconsin. Alaska also has community property
laws, but only if spouses voluntarily enter into such a community property
agreement. Not all community property states play by the same rules. “All
states have variations,” says Rendleman.
So if your husband or
wife has a separate card account and runs up debt, at death “it’s possible that
debt could pass to the spouse,” says Kerr. But it isn’t always cut and
dried. “I think there is case law going either way,” he says.
Bottom line: In community
property states, “you have to ask more questions,” says Kerr.
What
about the assets?
Not all assets go
through probate. Some items, such as IRAs, 401(k)s, brokerage accounts, and
insurance, typically pass to whomever you’ve named as a beneficiary, which
is one good reason to keep those designations up to date. In many cases, those
assets aren’t considered part of the estate.
go through probate,
the executor can’t use them to pay estate bills. So can the credit card company
go after the person who inherits?
With employer-based
pension plan accounts, such as 401(k)s, the answer is no, says Bruce Wolk, co-author of “Pension and Employee Benefit
Law” and law professor at the University of California-Davis. Since the plans
are protected by federal law, that won’t vary by state.
Insurance also
usually passes outside the estate, and in most cases it’s also safe from
creditors, says John H. Langbein, Wolk’s co-author and professor of trust law
at Yale Law School. With IRAs, “it’s a state-by-state question,” Wolk says.
“Although many states exempt IRAs from that kind of claim.” Likewise, with other
assets, such as a brokerage account or bank account, the answer may vary from
state to state.
Many states allow a
house to pass from one spouse to another after a death without letting
creditors intervene; many have laws that protect the family home from
creditors.
The question can get
more complicated if the house is in just one name, or if it’s passing to a
child, other family member or friend. If the home becomes an issue (or you’re
just worried that it could), talk with an attorney to find out exactly what a
creditor can and can’t do.
Hounded
after death
After Patricia’s
husband died with a $14,000 balance on one credit card, she started getting
collection calls. Patricia, a widow living in Oregon, asked that her last
name not be used.
For a few months,
while the estate was being settled, she kept up payments. There wasn’t enough
money in the estate to pay the entire bill. She learned that, as an authorized
user, she wasn’t responsible for her husband’s credit card. So she stopped
making payments. And that, she says, is when things got ugly.
Over the next 32
months, Patricia received regular calls from six different collection agencies.
The card company also reported her to the credit bureaus for nonpayment. A
letter to the Comptroller of the Currency, which regulates national banks,
fixed her credit report. But the calls continued.
“They would send me
letters and yell at me on the phone,” she says. Calls came at all hours, seven
days a week.
She repeatedly asked
the card company for proof that she was a co-signer on the account, she
recalls. They assured her she was but refused to show her any documentation.
Finally, she received a court summons: The company was suing.
Patricia hired an
attorney, who drafted a letter explaining once again that she was only an
authorized user. The creditor dropped the suit.
“They didn’t
understand the hell they put me through,” Patricia says. But she learned
something. “Don’t let them bully you,” she says. “Stand your ground. Make sure
you get the facts. And challenge them.”
When
collection calls come
If you start getting
collection calls after a death, you need to determine three things: is that
debt valid; is it within the statute of limitations (the
time limit that creditors and collection agencies have to collect on a debt),
and are you in any way liable for it? You also need to correctly handle collection calls.
Never rely solely on
what the creditor or collections agent tells you.
They didn’t
understand the hell they put me through. … Don’t let them bully you.
As host of a national
consumer call-in show, Dave Ramsey has heard all kinds of stories. Some
collectors “will say anything,” he says. “They’ll even lie to you and say
you’re liable when you’re not. That doesn’t mean they can collect.”
Joe Ridout, consumer
services manager for Consumer Action, a national advocacy group, has also
gotten an earful from consumers. “There are some shockingly inventive things
collection agencies will do to get someone to pay a bill they don’t owe,” he
says.
Worried about what action
a card company or collections agency could take? “Check with a lawyer,” says
James P. Caher, attorney and co-author of a book about bankruptcy law.
“Don’t pay them any money. Don’t believe them.”
What
to do with accounts after a death
If a family member
dies, the executor can notify the creditors. If you’re handling that duty
yourself and creditors need to be contacted individually, gather the bills,
call the card companies, and inform them the account holder has died. Find out
where to send a certified copy of the death certificate. Include a note with
the deceased’s name and credit card account number. Keep a copy for your
records, and mail it so that you have proof of when it was sent.
If representatives ask about payment, refer them to the executor. Don’t promise anything until you know what assets and bills the estate has, and what your rights are.
If representatives ask about payment, refer them to the executor. Don’t promise anything until you know what assets and bills the estate has, and what your rights are.
Sometimes card
companies, such as American Express,
will offer to let you take over an account if you agree to assume the debt and
can pass a credit check. If your credit isn’t as good, you may not inherit the
same low interest rate or high credit limit; if you don’t want the account,
close it.
Laura’s
story
After Laura’s
mother-in-law died, the family discovered she had no credit card debt but quite
a few credit accounts. “We were concerned that someone could start using the
cards,” Laura says. She is a resident of Indiana who asked her name not be
used.
They decided to close
them. But even though Laura’s husband had a power-of-attorney for his mother’s
affairs, “they wouldn’t talk to him,” she says. “They wanted it in writing.
They wanted the paper.”
She says she had to
send multiple notification letters and track who responded, who didn’t, which
accounts were closed, and which remained active.
After a death, Laura
says, “it’s just one more thing that’s a lot of work.”
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