Q: How are my credit cards and other loans paid off if I die leaving outstanding debts? Are they paid from my estate before my beneficiaries receive their inheritances or some other way?
—Mary, 61, New York
A: When someone dies, debts are typically settled from what's known as an estate. The estate consists of the items of value owned by the deceased — think cash, cars, real estate and the like. Whatever is left over is passed along to heirs as dictated by the terms of a valid will, or in the absence of a valid will the terms of state intestacy laws. (See sidebar for definitions.)
So while the debts of a deceased person don’t simply go away, surviving family members aren’t necessarily saddled with them, either. Generally, unless a family member is somehow directly connected to the debt, say by cosigning a loan or holding a joint account, he or she isn't personally liable for the debt.
One important exception to this general rule involves residents of community property states including Alaska, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In these states, property that couples acquire during marriage can be deemed to be owned by both spouses. As such, when one spouse dies creditors might be able to target this property to satisfy debts incurred by either or both spouses during a marriage. Consult an estate planning attorney who's familiar with the laws of your state.
A key duty of an estate’s executor or administrator is to identify and pay off all debts before distributing what’s left to the heirs. This may result in heirs receiving a lower inheritance than they'd expected. Creditors are generally out of luck if there are insufficient assets to pay off all outstanding debts, absent a liable party like a joint account holder.
As for credit cards specifically, credit card issuers are required to stop tacking on fees and penalties during the time an estate is being settled. If debt collectors start calling family members of a deceased relative, refer those calls to the executor or administrator of the estate.
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