Handling Credit Accounts When a Loved One Dies
The last thing you want to deal with after the passing of a loved one is bills. Yet the bills come as quickly as the condolences. In your grief it can be hard to distinguish between what you should pay and how you should handle the calls and letters demanding payment.
Understanding what you are responsible for and what the estate is responsible for will help you sift through the bills and determine how to address any remaining financial liability.
Account Types and Legal Responsibility
There are three basic types of accounts most people have. They include single accounts, joint accounts, and authorized user accounts.
Single accounts are owned by an individual. The person who opened the account is liable to pay back any debt associated with that account. Unless you live in a community property state, or you were the person who opened the account, generally, this is debt you will not be responsible for paying. All debt will be directed to the estate, to determine if there is enough money to cover the debt payment.
Joint accounts are owned by two or more people. It is common for both husband and wife to be on an account and jointly be responsible for certain debt. Your home and vehicle loans are commonly held by both parties in the marriage. Joint debt is also seen between parent and child and even siblings. If your name is on an account (even if you are a co-signer not a joint owner) you will typically be responsible for paying the debt off.
Authorized User occurs when someone else owns the account but gives another legal authority to make purchases. This is most often seen with credit cards. Spouses, children and employees are commonly given access to a credit card as an authorized user. It adds a level of convenience where the person can make purchases on the owner’s behalf.
The challenge with an authorized user is that the owner becomes legally responsible for all purchases made on the account. If the authorized user abuses this trust, the owner is still responsible for payment. Elderly parents may give a child a credit card as an authorized user to pay for medicine, food and other bills.
Secured Debt and Unsecured Debt
Secured debt is backed by an asset like a home or a vehicle. Unsecured debt does not have an asset the lender can take back if the debt is not paid. The death of an owner can result in the lender taking the asset or requiring the loan balance to be paid in full. This can create a financial hardship, in the case of a surviving spouse, who does not have enough funds to pay the debt off or enough income to qualify for a new loan.
In an estate settlement secured debt is paid in full before any unsecured debt is paid.
Probated Estate versus Direct Pay Outs
When someone dies the assets are distributed through an estate or through a direct payout. Typically accounts like life insurance and a 401K (if you have named a beneficiary) can be paid directly to the heirs you have assigned. Anytime you are able to choose a beneficiary on an account, it typically results in a direct payout to the heir.
This is significant because if the account or asset bypasses probate, then creditors generally do not have access to those funds. If the asset goes through probate either through the will or through intestate (without a will), then creditors will be paid before any funds are distributed to heirs.
Who Pays the Medical Bills When Someone Dies
Unless you sign forms agreeing to be liable for the medical bills, you will not be responsible for the debt and bills will go to the estate. However, some hospitals and doctors attempt to get caregivers (spouse or adult children) to sign forms agreeing to cover any debts not paid by insurance, therefore, the person requiring medical care should sign all liability forms.
Student Loans
Most Federal student loans are discharged when a former student dies with outstanding debt. Private loans and parent loans are a different matter. If you have co-signed a loan for a child or taken out a parent loan you are often required to pay the debt. For those lenders who do not discharge the debt with proof of death, there is generally an appeals process that may result in the debts being discharged.
How Does Estate Settlement Work
When a person dies, any assets or liabilities that are not paid out directly, will go into the estate. Typically an executor will manage the estate. After all assets and liabilities have been calculated the estate will either be solvent or insolvent.
A Solvent estate means there are more assets than liabilities. The executor will be responsible for paying all of the debts and the heirs will receive remaining funds after all creditors are paid.
An Insolvent estate means there are more debts than assets. In this case the heirs will not receive anything and the estate will pay based on the priority governed by the laws of the state. Common payout schedules dictate that secured debts are paid first, then funeral expenses, and then unsecured debts. Each category (ex: all secured debt) will be paid in full before the next category receives any funds. If there is not enough to pay all creditors in the category then payouts will be prorated.
In the case of a community property state, debts and assets will become the responsibility of the surviving spouse.
Steps to Take When a Loved one Dies
Creditors and collection agencies may attempt to collect a debt even if you are not legally responsible. The following steps will help you stay organized and address debts you are responsible for and not accounts where you have no liability.
- Get a copy of the credit report for the person who has passed away. This will give you a list of open accounts.
- Notify each company and inquire about any life insurance held on the account. Often credit cards and other loans offer credit protection in the event of a death. While this will generally not leave heirs with any funds, it can pay off the debt, leaving more money in the estate.
- Determine how the account was titled. Was it an individual or joint debt? For individual debts you can generally provide a death certificate and the account will be closed.
- For secured debt determine if you want to keep the item (car or home etc.) and speak to the lender about your options.
- Keep good records. During this time record keeping will save time and frustration. If a collector calls you will have needed information to show liability or lack thereof. If a debt you are not liable for ends up on your credit report, you will have documentation for a dispute to get it removed.
Losing a loved one is very stressful. While mourning a loss the last thing you want to deal with is debt and credit issues. Knowing your legal obligations will help you deal with credit accounts and not pay debts you are not legally responsible for.