What happens to credit card debt when you die?

What happens to credit card debt when you die?

When a person dies their debts still need to be repaid to their lender. The executor of the estate becomes responsible for paying back those debts. They can do this by using cash or personal savings that has been left as part of the estate, or sell some of the assets. It’s only after all debts have been repaid that any remaining assets can be inherited by the beneficiaries.

There is a specific order that determines which debts get top priority. Outstanding debts must be repaid in the following order:

1.     Secured debts.
2.     Funeral expenses, Testamentary and administration expenses (e.g. legal costs in obtaining probate).
3.     Unsecured debts.

It makes sense that secured debts (like a home loan) need to be paid first. The lender is entitled to sell the asset that acts as security for the unpaid loan (likely a home or other property) in order to recover their money. As credit cards are a type of unsecured debt, they are further down the list of priorities. But that doesn’t mean they’re waived when a person passes away. In fact in New South Wales, for example, the executor of the estate may be personally liable to any unpaid creditors, if they fail to utilise assets to pay off remaining debts.

If you’re personally getting your estate affairs in order, the Australian Securities & Investments Commission’s Moneysmart website states that having life insurance can potentially help repay debt and cover living costs for a partner and/or dependents when you pass away. You can find out more about term life insurance as well as compare life insurance with Canstar.

What happens to joint credit card debt when you die?

Generally speaking, beneficiaries of the estate can’t be asked to repay debts after a person has passed away. But there are exceptions if:

• the debt is held jointly by them and another person
• the debt is secured by an asset that someone else (such as a beneficiary) owns
• another person, such as a beneficiary, has agreed to act as guarantor for the debt.

So, in the case of a credit card that’s held jointly by a couple, the surviving partner can be responsible for repaying the total card debt if one member of the couple passes away.

What happens to credit card debt when you die and have supplementary cardholders?

If the deceased person was the primary cardholder but family members hold supplementary cards linked to their account, the debt still rests with the primary cardholder. Supplementary cardholders can’t be asked to pay the debt (because it’s not in their name). At the same time they’ll be unable to keep using the cards, which will likely be cancelled by the card issuer.

What happens to credit card debt if you die with no assets?

When someone dies, any outstanding credit card debt will normally be paid out of their estate. As noted above, if there’s not enough cash to pay the card debt, assets can be sold to clear the balance.

If there aren’t enough assets to pay the debt, the executor may need to get in touch with the credit card issuer, such as a bank or other financial institution. They’ll need to explain that the debt can’t be repaid, and request that the amount owing is written off. However, a creditor doesn’t have to agree to this. If the debt amounts to $5,000 or more, a creditor can make a court application requesting that a bankruptcy trustee is appointed to the estate.

What support is available?

If you have lost a loved one and are working through financial matters, you may find it helpful to access counselling and support services.

Grief counselling and bereavement services

Confidential and free counselling services are available if you are grieving. For 24/7 crisis support, you can contact Lifeline on 13 11 14 or Beyond Blue on 1300 22 4636. Specialist bereavement services are also available. For example, Griefline and the Australian Centre for Grief and Bereavement (in Victoria) offer bereavement counselling and support services.

Financial counselling

If you have credit card debt and would like support with managing it, the following resources may help:

• Free financial counselling is available from the National Debt Helpline (NDH). You can call the NDH on 1800 007 007. As well as managing the helpline, the NDH can connect you with individual counsellors and organisations nearby.
• You can find out more about debt consolidation options with Canstar. If you are considering credit card debt consolidation with a balance transfer or a debt consolidation loan, ensure you consider the Product Disclosure Statement (PDS) and Target Market Determination (TMD) that apply. You should also consider the PDS and TMD if you are considering purchasing or taking out a life insurance policy. You can contact a product issuer directly for a copy of the PDS and TMD before making a purchase decision.

Legal advice

The laws that apply around who can make a claim on a person’s estate can be complex. It may be worthwhile to speak to a qualified legal professional for tailored advice on what is likely to happen if you, or a loved one, pass away owing money on a credit card or have other debts. Free legal advice is available if you’ve personally received a default notice, or are being taken to court because you owe money.

Cover image source: PeopleImages.com – Yuri A/Shutterstock.com