Credit Card Debt After Death: Who's Responsible?

Seeing as how it is nearly impossible to function without a credit card today, it is no wonder many of our trust administration and probate clients are having to contend with taking care of credit card debt after a loved one has passed away. From experience, credit card debt is often a big headache for our clients to deal with, because the debt itself is sold off to debt collectors quickly and now the debt collectors are calling the executor or trustee saying they have to pay off the debt and do so quickly. Typical debt collector tactics. That does raise the question however, who is responsible for the debt?

Co-Owners, Co-Signers, and Sureties

As you might expect, joint owners, co-signers, or those who agree to be responsible for the debt of another if they fail to repay a debt are going to be the first in line for repayment of a decedent's credit card debt. In this case, it’s the same as if the survivor was a co-owner on a bank account. Upon the debt of one owner, the account becomes the property and responsibility of the survivor. For a bank account, it’s the money held inside. For credit, it's the outstanding debt on the card or account, regardless of who caused the debt to be incurred to begin with.

Sureties, while not as common of a case as co-owners, nevertheless have the same outcome, just more explicitly. A surety is one who takes responsibility for another person's obligation. If you are the surety of someone's debt, then you are agreeing to be responsible for that debt if the borrower does not repay, the same as if you borrowed the funds yourself. An example is a parent agreeing to be responsible if their child does not pay their car payments, or in this case, credit card debt.

Community Property

Co-owners and the like are a straightforward situation since we have someone agreeing on paper to be responsible. However, if you live in a community property state, then you may be responsible for your spouse's debts, credit cards included, in certain circumstances.

For example, here in California, the surviving spouse is responsible for paying the late spouse's debts that were acquired during the marriage as it is presumed community property and thus a community property debt, even where only the deceased spouse's name appears on the bill. Thus, if your spouse bought a car during the marriage but only put their name on it, then you are likely also liable for that debt. You would need explicit evidence that debt was considered only the decedent's separate property. Separate property being assets, or in this case debts, acquired prior to the marriage or where there has been an explicit agreement in writing, as to the character of property.

Separate Property

However, that's not quite the full story. Again, community property debt is owed by the surviving spouse, but the late spouse's separate property debt must be paid by the surviving spouse if they acquire the late spouse's separate property outside of probate. What does that mean? If you inherited your late spouse's assets through something like a trust or transfer on death deed, and even if that asset was owned by your late spouse prior to your marriage, then you also inherit their separate property debts, even those incurred before getting married.

The reason for the probate distinction is since there is a creditor claim period for estates passing through probate wherein creditors must file a claim within the claim window or else lose the right to collect against the estate. Essentially, because a court is involved, creditors must follow the court's timeline for claims and adhere to court oversight, otherwise they don't collect. However, before you think it's thus better to allow an estate to pass through probate so as to potentially avoid the debt, keep in mind that probate can easily be 2-5 times more expensive than an estate passing through a trust and you legally cannot simply put your head in the sand and try to avoid creditors to "run out the clock" on the creditor claim period.

Community Property States

On a quick note, only a few states are community property states, those being Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Spouses in Alaska can also declare that certain assets are community property assets, but you should speak to an Alaskan attorney for more details. Additionally, there is the concept of quasi-community property - property acquired in a separate property state while domiciled there that would be considered community property had it been acquired in a community property state. This is where a married couple buy property in Wyoming, they move to California but keep the Wyoming property, so California is their new domicile, and one spouse passes away or they get divorced. That Wyoming property can be considered quasi-community property and is then treated the same as if it was community property from the start.

Too Much Debt, Not Enough Estate

What if there is too much debt and not enough estate to cover it? Firstly, if there is no money in an estate then nobody gets paid, creditors and heirs alike. However, if an estate has some but not sufficient funds to cover all its debts, then the money that is there pays for debts in the following order of priority:

1. Property not dealt with in the Will (if there was a Will);

2. The residue of the estate, which is any property or assets left over after specific gifts or bequests are made;

3. Property specifically appropriated for the payment of debts (you can leave instructions in your will or trust that certain funds like life insurance monies, are to be used for debts like schooling or a mortgage for example);

4. Property charged with the payment of debts;

5. Pecuniary legacies, which are gifts of money only rather than property or goods; and finally,

6. Other bequests or gifts, as in whatever is left.

Always Check the Estate Planning Documents

You should review any estate planning documents left behind (such as a trust or a will) to see if they provide any direction on settling outstanding debts. Trusts often indicate that trustees or beneficiaries are not obligated to pay the debts but give the trustee the authority to settle and negotiate them. You should often speak to an attorney before exercising such powers or if you are unsure what authority you might have.

Keep in mind, if there are no estate planning documents in place and the decedent’s estate must go through probate, the court may order outstanding debts to be paid if a creditor files a claim. Individuals are not liable for credit card debts, but the decedent’s estate and joint account holders are.

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