What happens to credit card debt when you die?

Uncertainty around who becomes responsible for credit card debt when a person dies can be a source of worry for some Australians. We look at what happens to debts, such as an outstanding credit card balance, when you pass away.

Does your credit card debt die with you? Could family members be asked to pay it? We shed some light on what can be a complex and difficult topic to deal with.

What happens to credit card debt when you die?

When a person dies, their debts still need to be repaid and the executor of the estate becomes responsible for paying the debts. They can pay off the debt by using cash or personal savings left as part of the estate, or – if necessary – sell some of the  assets. It’s only after all debts have been repaid that any remaining assets can be handed over to the beneficiaries of the estate: in other words, the people inheriting the assets.

There is a specific order that determines which debts get top priority. According to Sydney-based law firm Bateman Battersby, outstanding debts must be repaid in the following order when someone passes away:

1.     secured debts
2.     funeral expenses
3.     testamentary and administration expenses (e.g. legal costs in obtaining probate)
4.     unsecured debts.

It makes sense that secured debts (like a home loan) need to be paid first. After all, the lender is entitled to sell the asset that acts as security for the 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, Bateman Battersby says in New South Wales, as an example, the executor of the estate is entitled to use the assets to pay off debts – and “failure to do so can expose the executor to a personal liability to any unpaid creditors”.

If you are personally getting your estate affairs in order,  Moneysmart says having life insurance can help repay debt and cover living costs for a partner and dependents when  you die. You can find out more about term life insurance, and compare life insurance with Canstar.

What happens to joint credit card debt if you die?

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

1. the debt is held jointly by them and another person
2. the debt is secured by an asset that someone else (such as a beneficiary) owns, or
3. 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. As a rule though, family members don’t inherit any debts.

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

If the deceased person was the primary cardholder but family members hold supplementary cards linked to their credit card 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). Nor will they be able to keep using the cards, which will likely be cancelled by the card issuer when the person passes away.

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 we noted earlier, 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, law firm AH2 Legal says the executor may need to get in touch with the credit card issuer, such as a bank or other financial institution, 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

If you have lost a loved one and are grieving, confidential and free counselling services are available. For crisis support, you can contact Lifeline on 13 11 14 or Beyond Blue on 1300 22 46 36 24 hours a day. Specialist bereavement services are also available. For example, in Victoria, the Australian Centre for Grief and Bereavement offers a state-wide bereavement counselling and support service.

Financial counselling

If you have credit card debt now 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.

Main image source: Elle Aon/Shutterstock.com.