Receiving an inheritance is a trying time — seeing as it usually follows the loss of a family member or loved one. While in the thick of grief, the last thing you want to worry about is if you’re responsible for the credit card debt of your deceased relative. However, it’s something you must face eventually to settle their estate.
Inheriting money isn’t always straightforward, especially if there is debt involved. We created this guide to help demystify the process so you know how to manage your loved one’s debts.
Can you inherit debt?
After receiving an inheritance from a loved one, one of the first questions you may have is whether you also inherit their debt. Heirs are generally not responsible for the debts of someone they inherit from — whether a parent, grandparent, or someone else. However, there are certain situations where an heir may be liable for the debts of the deceased, such as:
- Joint-ownership: If you are a joint owner on a debt with the deceased, you are equally responsible for the debt. Since the co-owner passed away, you are now solely in charge of paying off any outstanding balances.
- Co-signer: If you are a co-signer on a debt such as a mortgage or auto loan and the primary borrower passes away, you alone become responsible for the debt. Note that this does not apply if you are an authorized user on a credit card.
- Community property exception: If you are the deceased person’s spouse and live in a state with community property laws, you may be obligated to repay their debts. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin are the only states that impose community property laws.
No two estate settlements are the same, and each state applies different procedural rules regarding debt. Hiring a local attorney to help you navigate the process is critical when settling the estate of someone with debt.
What happens with credit card debt when someone dies?
As an heir, you’re likely not on the hook for your deceased loved one’s credit card debt — however, that doesn’t mean the debt disappears. Generally, a deceased person’s estate must pay off their remaining debt before giving any money to heirs.
However, if the person’s estate is insolvent — meaning there isn’t enough money to cover the credit card balances — the creditors may be out of luck. In the case of an insolvent estate, the estate must repay debts according to priority, with secured debts (debts secured by an asset) higher up on the list than unsecured debts (such as credit cards.)
If your relative passes away with credit card debt, you might start receiving calls regarding their debt. A debt collector is legally allowed to contact a deceased person’s spouse, parents, guardian, or executor of the estate to discuss the debt.
However, a debt collector cannot mislead you into believing you’re responsible for the debt if you’re not. It’s essential to be aware of your rights under the Fair Debt Collection Practices Act (FDCPA).
Are heirs responsible for debt?
As an heir (unless you are the surviving spouse and live in a community property state), you are likely not responsible for your deceased relative’s debts. So, if you’re not responsible for the debt, who is?
When someone dies, their estate generally pays off any debt they left behind. When it comes to repaying debts from an estate, not all debts have an equal claim. Secured debts — debts secured by an asset (i.e., mortgage or auto loan) — take priority over unsecured debts such as credit cards.
A deceased person’s estate may sell their assets to help cover the costs of repaying their debt. If there was a mortgage or auto loan attached to their assets, the estate must repay the creditors out of the proceeds of the sale to release any liens they have on the property.
However, credit card debt is unsecured, which means that credit card companies get paid after the mortgage and auto loan lenders. If the estate runs out of money, they are out of luck.
No matter how high a priority a particular debt is, there are some assets that creditors can’t touch, such as:
- Assets held in retirement accounts (i.e., 401(k), 403(b), SEP IRAs, Roth IRAs, 457 plans, etc.)
- Life insurance
- Assets held in a living trust
- Brokerage accounts
- Real estate (depending on state law and how the property is titled)
Next steps after you inherit
After a loved one passes away with credit card debt, here’s what to do:
- Notify the credit card companies: One of the first steps is to notify the credit card companies about the death of your loved one and request to close the account. If you’re a joint owner on the account, you may choose to keep the card. If that’s the case, still inform the credit card company so they can change the account registration.
- Inform the credit bureaus: The credit card companies will likely report the death to the credit bureaus, but it could take a while. It’s best to notify the three major credit bureaus (Experian, Equifax & TransUnion) yourself to ensure there are no delays in updating the credit file. This helps protect the deceased’s credit report from identity theft.
- Stop using cards you are an authorized user on: If the primary cardholder passes away, you should immediately stop using the card if you are an authorized user. If you continue to use the card, you might find yourself in legal hot water. Using the deceased person's card (even if you are an authorized user) is illegal.
So, can debt be inherited? Though uncommon, it is possible. If you were a co-signer or co-owner, you are equally responsible for the debt and must repay it — not doing so could result in legal action taken against you. It’s best to contact the deceased’s credit card companies and other lenders right away to determine your responsibilities.