The benefits of credit cards are well documented as nicely highlighted in this article by Credit Card NZ; the cons are also well known, but what happens when one dies and leaves behind a mountain of credit card debt?
You would be forgiven for thinking that your credit card debt goes away when you die, but the fact of the matter is that when you die your estate becomes liable for your credit card debt. If you are married or have children this can mean your family is left picking up the pieces.
Death is not the end, at least not of credit card debt
If you think that waiting for death to take care of your credit card debt is a clever idea, you might want to think again. It’s true that you wouldn’t keep piling on debt because you wouldn’t be here to continue spending, but the debt will be inherited by your estate.
Legislative differences around the world affects the way that credit card debt is handled after the death of the credit card owner in different countries. But the most common way to handle it is that the credit card company will try to take the amount you owe them from your estate and assets.
Once they do this and they deduct the amount you owe them from your assets and estate, your beneficiaries will have access to anything that’s left. This is of course assuming that your estate and assets are enough to cover your debt.
If that’s not the case, the bank will have to write the debt off as a loss. As you can imagine, the bank will try to avoid this and they will do whatever is in their power to get their money back. That bank is probably the same institution that holds the rest of your accounts such as savings account, transaction account, home loan and other assets that can be controlled. The problem for the bank is that before they get their hands on those assets, they have to get a court order to be able to sell your assets to cover your debt.
Credit card debt structures
The way that banks handle credit card debt after a client’s death depends on the credit card debt structures in place. In some cases, credit card debt won’t necessarily have to be settled in case of the client’s death; for example, when we have a joint credit card account. When one of the holders dies, the debt simply must be dealt with by the other.
One of the characteristics of credit card debt is that it’s an unsecured debt, which means that you don’t give the bank any security against a property or an asset. If you do decide to secure your credit card, that’s the asset or property that will be used to pay off the debt in case of your death. If your family doesn’t want that to happen, they will have to find another way to settle the score. In a way, they inherit your debt.
Other kinds of debt
If by the time of your death you have other kinds of debt, like home loans or personal loans, your family won’t be forced to pay it off, but it could easily be taken from their inheritance.
The executor of your will doesn’t only have to make sure to follow your wishes, they also have to make sure that the creditors are paid. In order to do that, they either take money from your estate or sell property or assets in order to settle any debts. If there’s not enough money, creditors can write off the debt.
But, let’s say that your home loan is joint or that your debt is secure on someone else’s asset, then someone else will definitely be forced to carry out that debt or have a plan in order not to lose their properties or assets.
Settling debts after you’re gone
If you think paperwork is over when you die, think again. Your creditors don’t instantly know the circumstances of your death nor the situation of your estate, so they have to get things in order with the help of your family to control and close down your credit cards.
The bank of course will need your death certificate before your family can take any action, such as get your card frozen or a reduction of interest rates so that debt doesn’t keep building up while the account settlement gets done. Proof of dead and of their relation to you is also necessary for your family members to close your accounts or assets.
Your family members will need to provide a letter of administration or probate, and the details and proof of the authorised representative of the estate. This information of course will be vetted and then your representative will get access to the overview of your assets and accounts.
How does life insurance take part?
Preparing for death is something natural and practical. If you don’t have life insurance, you should rethink this decision because a good life insurance will help your loved ones pay any debts you may leave behind. Consult your financial advisor so they can help you choose the right policy for you.
What to do with existing credit card debt?
At the risk of sounding too obvious: if you have credit card debt you should aim to pay it off as soon as you can. If you get yourself organized, this can be a lot easier than what you may think. Look for guidance and help! The Internet for one is full of great advice and information on how to get out of debt, so the best thing to do is to get started with your research and think of a good plan.
As we’ve learned by now, debt doesn’t magically disappear after you die. Your family, and in some cases your friends, have to deal with a lot of financial details, paperwork, and something they even have to take money out of their own pockets to deal with the problem you left behind. Always aim at being a responsible human and deal with debt in a healthy and intelligent way before it gets out of hand.