Have you ever wondered what would happen to credit card debt if you die? Do your spouse, kids or relatives inherit your debt? Or does your debt die with you?

According to Credit Cards NZ, a New Zealand credit card comparison website, about a 3rd of all New Zealanders are unaware of what happens to their debt when they die – that’s a bit alarming.

What happens to your credit card debt when you die depends on a few factors, so let’s take a look at some of these factors and how your debt may be dealt with after you die.

Unsecured debt

Credit cards are considered unsecured debt; this means there’s no asset tied to the debt. When you die, this makes it more difficult for creditors to collect on the debt. However, they may still be able to get paid by taking the matter to the court to recover their money from your estate.

Contacting financial institutions

When you die, a relative will need to notify each of your financial institutions (banks, credit card and loan companies, etc.) of your death. These institutions usually have bereavement specialists who will help your family member through the necessary steps of dealing with your estate.

The bank will ask your relative/executor for specific information about you (as the deceased) and may even ask for a certified copy of the death certificate and possibly your will.

Your financial institution may also ask your relative or executor to fill out a “deceased state notification form”. The form includes the following information:

  • The relative’s name, their relation to you, their address and other contact information
  • Your name (the deceased), address, date and place of birth
  • They will ask if there’s a will and for a copy of the death certificate

Next, your bank will review your assets and debts, then look to see if your assets can be applied to any outstanding debts you may have had. If there’s enough money to cover your credit card debt, the bank will pay this off and then release any leftover to your heirs (also called beneficiaries).

Your executor or administrator needs to call all your credit card companies as soon as possible after your death. After they’ve been notified of your death, the credit card company will usually freeze the account, which keeps additional interest from accruing.

Your Estate

Debt from credit cards can also be paid by your estate. What is your estate? According to the law, it’s everything you own – all your property. It’s always a good idea to have a will explaining how you’d like your property handled, and you should also appoint an executor (also called an administrator) who will deal with your money and property after you die.

The executor will take care of debts, disbursement of assets, etc. and may even have to sell some property from your estate to pay any outstanding debts you leave behind.

Your estate becomes responsible for debts

When a person dies, their estate becomes responsible for any outstanding debts of the deceased. At this point, the executor of your estate will need to review all of your assets and debts, and then determine how and in what order to pay any outstanding bills. Any remaining assets are distributed to your heirs according to your will or the law (if there is no will).

If there’s not enough cash in your estate, the executor will sell any property (land, house, personal items, etc.) to raise money to pay the debts. This is only done if you leave behind any property and/or physical assets.

In addition, if your debt is more than assets you may have, they’ll next take your savings account and use whatever’s there to apply toward your debt, rather than the funds being given to the heirs in your will.

If there’s not enough money after the estate sale and liquidation of other assets, then the credit card company will usually write off the debt – as if it never existed. Lenders in Australia can’t force anyone in your family to pay your personal debts.

It’s important to note that creditors have up to six months to make a claim on your estate for any debts you owe when you die. During this time, the estate can’t be distributed to beneficiaries. They must wait until all the claims have been settled. So, it’s possible your outstanding debts could eat up any inheritance you hoped to leave your beneficiaries.

Special circumstances

There are special circumstances when a family member might be held responsible for your personal debt. These include:

1. If they acted as a guarantor on a loan you’ve taken out

When you act as a guarantor on a loan for someone else, you are responsible for repaying the debt if the borrower stops paying. Whoever has acted as a guarantor on a loan for you will be held responsible for that debt if you die.

2. If a spouse or family member was a co-signer (joint account holder) on a credit card

Anyone who is a co-signer or who has a joint account with you (credit card, etc.) will be held responsible for the debt. However, if someone is only an authorized user on the account, they won’t be forced to pay the outstanding debt.

As you can see, it’s important to plan ahead. Create a will detailing how you’d like your estate handled, make sure to assign an executor for your estate, and if possible, it’s a good idea to pay off any current credit card debt you have now and avoid carrying large balances. Then you can rest assured your debt is taken care before you go.