What Happens to Credit Card Debt When You Die?  

When a person dies, their belongings pass onto the living. There’s little you can take beyond the grave with you, and few of those things may be substantial assets, such as a home or investment property. As such, creditors and lenders – particularly those you owe – can turn towards the remnants of what material wealth you've left behind to satisfy their outstanding debts and balances. This includes credit card debt. Continue reading to learn what happens to credit card debt when you die.

But there are a few caveats. It's not as though a credit card company can show up at your child's doorstep and demand the keys to the home after your death. Everything has a procedure, including paying debts from beyond the grave.

Technically, you don’t have to pay a cent after you’re dead. But your estate does, insofar as it remains probatable. Everything you own must be somehow distributed among the living when you die. Everything not already accounted for somehow – we will get to that later – must be accounted for via probate.

The probate process is also where your will is legitimized. Even a signed, witnessed, and notarized will must be legitimized through probate before your chosen representative or executor can act on it. And within the probate process, creditors and lenders can finally claim a portion of your estate for your outstanding credit card bills.

Your Debt Doesn’t Disappear

Death does not do away with debts. However, instead of being personally responsible for your debt, the debt becomes owed by your estate, and your representative becomes responsible for seeing that it is paid through, albeit only through your estate.

To determine what happens to credit card debt when you die, the total of your debt must first be calculated. For example, if you leave behind about $3,450 in total value and die with a credit card debt of $12,400, your creditors may claim what you've left behind. Still, they cannot hound your representative nor your beneficiaries for the rest of the debt.

Time Limit for Creditors

There’s also a time limit to when and how creditors can file a claim against your estate. Once probate begins – after your chosen representative, or a dutiful loved one, petitions the courts and gets a date – one of the first orders of business is to notify both creditors and beneficiaries. Your representative does not need to go out of their way to contact every creditor individually, especially if they aren't sure who or what you owe. But they need to publicly announce your death and subsequent probate process, usually via the local newspaper. This is how most lenders and creditors pick up on the potential for a claim.

Every state has a deadline for companies to no longer issue claims against an estate. In California, this period is about sixty days from when the creditor receives a personal notice or four months from when the personal representative is first issued letters regarding the start of probate.

If a creditor fails to issue a claim within the deadline, that’s that. They cannot pursue the debt.

If a creditor does issue a claim, then it’s a matter of determining how the estate should pay it. The contents of an estate cannot be distributed until all debts are paid off – your personal representative is responsible for withholding the contents of the estate from would-be heirs until they're sure there aren't any final debts left to resolve. Prematurely distributing the estate may result in a complicated situation, to say the lease.

What About Other Types of Debt?

Nearly all debts require creditors to file a claim against the estate and claim what they can. Certain debts supersede others, and it is not always first-come-first-served. For example, if the decedent was under lien, the creditor who claimed a lien will usually be the first to collect on their debt.

Suppose the debt was on a particular property, such as a loan on the family home. In that case, an arrangement could be made to allow the beneficiaries who inherit the property to continue making payments on behalf of the decedent while retaining said property.

Can You Avoid Probate?

We mentioned that probate is needed to create a claim against an estate. But not all assets are transferred through probate.

There are ways to transfer your assets to your loved ones outside of probate and protect these specific assets from creditor claims. This doesn’t always work – for example, transferring a home with a second mortgage via a transfer on death deed does not wipe the mortgage from existence. Your beneficiary will likely need to keep paying off the debt.

But credit card debt is different. You can protect certain assets by transferring them outside of probate through transfer on death deeds, beneficiary designations, trusts, and co-ownership with right of survivorship.

Beneficiary Designations

Beneficiary designations and various Totten trusts or deeds all function on the same basic principle – by attaching a beneficiary's name to an asset with a signed deed, you can automatically transfer that asset upon your death with no need for probate or a will. You can do this with certain bank accounts, as well.

Your state’s regulations limit what you can and cannot transfer this way – but a few things are nearly always transferable through death deeds, including retirement account remainders and life insurance payouts.

Living Trusts

Trusts are a little bit more complicated. A living trust goes into effect the moment you create it – unlike a will, which is testamentary, trusts are entities created through the document in which you define them, allowing you to transfer assets into a trust's name and let an independent trustee manage them for you.

Separating certain assets from yourself may be a good idea if you are in financial trouble – this allows you to protect the family home and select other assets from creditors who might otherwise rip into whatever you leave behind.

Some trusts offer comprehensive asset protection, while others don't. Do not rely on online templates or simplified trusts to protect your assets – work with an estate planning professional to understand how to completely shield your assets from debt and legally transfer your most prized possessions to your loved ones. Now that you know what happens to credit card debt when you die, consider discussing it further with an estate planning attorney at Werner located in Santa Barbra, Santa Clarita, Simi Valley, or Westlake Village.