What Happens to Credit Card Debt After Death?

Here we explain what happens to debt, such as outstanding credit card balances, when a person passes away.

This is particularly relevant for many Australians, as according to a 2017 review by ASIC, outstanding credit card balances in Australia totalled almost $45 billion. With so much owed on credit cards, it’s no surprise that some people pass away with a balance still left to pay.

One option to consider if you are looking to clear your debt is a balance transfer. The table below shows a snapshot of low rate credit cards with 0% balance transfers with links to providers websites. These results are sorted by Purchase Rate (lowest to highest) then by Star Rating (highest to lowest) and are based on a monthly spend of $4,000. 

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What happens to debt when a person passes away?

How a debt is handled when a person dies depends partly on whether it is secured or unsecured debt:

• Secured debt is money that’s borrowed against a particular asset, such as a car or a house. If you cannot repay this kind of debt, the lender may be able to repossess the asset to recoup their loss.
• Unsecured debt is not secured by any one asset, meaning the lender would not be able to sell an item to cover the amount borrowed. Instead, they may have to use other avenues to recoup the money.

Credit cards are classified as unsecured debts, because the money borrowed isn’t secured by a specific asset. In the event of a person’s death, the bank may use the estate (the savings or other assets a person owns) to pay off the remaining debt.

If there aren’t enough assets in the estate to repay the debt in full, the remaining amount owed may need to be written off as a loss to the lender, or in some cases may be covered by credit card insurance or life insurance if the cardholder had a policy in place.

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Do your family members have to pay off your debts?

Generally speaking, in Australia lenders cannot force family members to pay off your debts. But there are some circumstances where a family member may be required to pay the debt. For example, if they are a joint holder of a credit card or are otherwise responsible for a debt, such as by being the guarantor on a loan.

In most other cases, where possible the repayments of any debts will be made out of the deceased person’s estate.

If the circumstances mean you do end up having to pay off the credit card debt of a loved one who has died, you may be able to come to an arrangement with the lender to help you get through the difficult time. For example, some lenders may put special provisions in place in the event of hardship – like freezing fees or interest – although they are generally not obliged to meet such requests. As discussed below, it can a good idea to speak to the lender as soon as you are ready.

What do you need to do if your loved one dies?

The process to follow when a loved one dies may vary from one financial institution to another, but it often looks like this:

1. Notify the lender: Many lenders have a dedicated bereavement service to handle a deceased customer’s affairs. It’s important to make contact with the bank as soon as you can, as they won’t always know if their customer has died. Dealing with the death of a family member may be made even harder if a financial institution continues to send letters or statements because they are unaware of the situation.
2. Provide the necessary documents: Typically you will need to provide a certificate of death and other documents, such as the deceased’s will (if they had one) and information about how you were related to them.
3. Assessment: The bank reviews the deceased’s debts and any savings.
4. Release: If your loved one held a savings account at the same bank, the lender will usually seek to pay the credit card debt using the savings. This may be subject to provisions in the will and any other debts the deceased may have had. If this process is followed, any remaining savings are usually then released to the estate.

Keep in mind that a lender may also be able to make a claim against other estate assets in order to cover outstanding debt. Repayment of debts is one part of the process of winding up a person’s estate when they die and is typically managed by the executor of the estate. The executor is usually appointed in the will.

Does life insurance cover credit card debt?

An appropriate level of life insurance may help protect family members from financial stress when a person dies.

If the deceased person had this kind of cover in place, depending on the specific policy, it may be used to repay outstanding debt such as money owed on a credit card. But credit card debt isn’t the only potential source of financial stress for loved ones when a person passes away. Outstanding bills and funeral expenses may also be covered by a life insurance policy.

There are four main types of life insurance:

• Term life insurance: Provides a lump sum payment to your nominated beneficiaries (often your spouse and/or children) when you die or are diagnosed with a terminal illness.
• Trauma insurance: Provides a lump sum of money to help you meet medical expenses and clear debts when you have suffered a medical trauma.
• Total and Permanent Disability (TPD) Cover: Provides a lump sum payment if you become totally and permanently disabled and are no longer able to work.
• Income Protection Insurance: Provides a monthly payment if you are unable to work  – for example, due to serious illness or injury.

The following table shows a snapshot of life insurance policies on Canstar’s databse with links to providers’ websites. The results in this table have been sorted by Star Rating (highest to lowest) and are based on a 30-39 year old male professional, who is also a non-smoker.