Question: “I’m 62 years old and I have no estate and nothing of value. I rent my home and I own my vehicle. After being diagnosed with colon cancer, I’m now cancer-free and plan to enjoy the rest of my years, but I’ve been wondering: Are my two adult daughters responsible for any of my credit card debt when I pass away? What happens to my debt when I’m gone? Is anyone responsible for it? Who can help me understand this and plan for it?”
Answer: Wondering what will happen to your debt after passing away is an understandable concern, especially if you’re wanting to enjoy the years ahead without leaving loose ends for your loved ones, says Brit Simon, National Debt Relief’s chief experience officer.
As for what pros might be able to help you, in your case, your estate seems relatively simple and you may not need a financial adviser or estate planning attorney. (At a later date, if you do want a financial adviser, you can visit sites like CFP Board or NAPFA or use this free tool to get matched with financial advisers, from our ad partner SmartAsset.) That said, if you are looking to create a plan to give, say, your car or other assets away, it may be smart to speak with an estate planning attorney or at least create a basic will online if you can’t afford to work with an attorney on a full estate plan. More on this below.
What will happen to your debts?
“The good news is that unpaid debts often don’t automatically pass to family members. In a situation without a mortgage or car loan, there may only be unsecured debts that would not be passed on. Unsecured debt would include any credit card debt, medical bills and personal loans that are not tied to collateral,” says Simon.
Typically, unsecured debts are paid from the deceased’s estate, since creditors can’t use property to settle balances. “If the estate has little or no value, then these debts are often left unpaid. This means any credit card debt or medical bills would likely not be passed on to family members. They may still be responsible for the debt if they were joint account holders or co-signers, but not if they were an authorized user on the credit cards,” says Simon. Additionally, if they never had anything to do with the credit cards at all, they’d also likely not be responsible for any debt payments.
Credit card debt is usually only a risk to the person whose Social Security number is on the account, says attorney Michelle Creeden at The Law Office of Fox, Kohler & Associates. “This means as long as your daughters are not on your cards as a joint cardholder, they will not be responsible for those debts. An authorized user is someone you allow to borrow money in your name. Your daughters could be listed as authorized users and they would still not be responsible for the credit card debt,” says Creeden.
What’s more, Creeden says, when someone dies, a credit card company is not allowed to scare family members into paying debts. “Their only recourse is to attempt to collect from whatever the deceased person leaves behind. As you are a renter, they will likely only send some letters addressed to the estate of the deceased person’s name. If there are truly no assets, then the credit card company will have no way to collect and will attempt to write off the debts to get a tax break,” says Creeden.
In community property states, there are some exceptions to be aware of. “In California, Texas and Arizona, a surviving spouse can be responsible for certain debts incurred during the marriage, even if the account was only in one name,” says Simon. Children however, are not personally responsible for their parent’s debts unless the child was a joint account holder.
Additionally, state law may be important for you. “In some states, an asset like a car or bank account may require a probate estate be opened to transfer ownership of the asset. I tend to advise my clients to try to avoid probate if possible,” says Creeden. To do this, you’ll want to create beneficiary designations, transfer-on-death registrations or a living revocable trust. For someone with low assets, this can often be done without hiring an attorney and instead using online low-cost services like Rocket Lawyer or LegalZoom.
Looking at the big picture, a person’s estate is legally responsible for their debts, which become due upon death. “The estate is responsible for paying these debts using assets and there is usually an opportunity to negotiate and reduce some debts. Ultimately, if the estate does not have enough assets to pay the debts, the debts may go unpaid,” says Delaney Haley, certified trust and fiduciary adviser and head of customer care at estate settlement site Alix.
What pro should you look to for help?
If you’re looking to create a plan to protect your family from debts, it’s best to speak with an estate planning attorney. “That’s the best bet for handling any circumstances that have to do with money after someone has passed. They can establish a living trust so that all matters, including credit card debt, are written into the trust so that the owner or party that is the borrower has their final wishes handled appropriately,” says Steven C. Conners, president at Conners Wealth Management. Adds Simon: “Clarify what obligations will apply to your situation and the steps you can take to reduce uncertainty.”
Jillian Stephenson, certified public accountant and assistant teaching professor at Carnegie Mellon University’s Heinz College says it’s prudent to consider estate planning prior to death to protect the interest of the estate and any beneficiaries. “As an estate is settled, any debts are satisfied by the estate assets. In this case, the estate would consist primarily of the vehicle and some small possessions. The estate assets would then be used to satisfy the credit card debt, but if the estate’s assets are insufficient, any remaining debt would go unpaid,” says Stephenson.
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