Secured vs. Unsecured debt
The first step to understanding your responsibilities over a decedent’s outstanding debt is learning the difference between secured and unsecured debt.
Secured debt: Applies to monies borrowed against a particular asset. This type of debt includes mortgages for a house and car loans. Used as collateral for the amount owed, the property or vehicle can be repossessed and resold by the lender in the event that the borrower is unable to repay the debt.
Unsecured debt: Refers to monies borrowed without using any asset as collateral. In case this kind of debt is left unpaid, the lender will pursue other means to enforce its fulfillment. Because credit card debts are not tied to any particular assets, they are classified as unsecured debts.
Are family members required to pay the outstanding credit card debts of the deceased?
Family members of the deceased are not obligated to pay off the outstanding credit card debt left behind by the decedent. Authorised users of the decedent’s credit card are likewise not responsible for paying off the debt. In some situations, however, the estate may request reimbursement if the authorised user has added significant run up costs to the decedent’s debt.
If collection agencies pursue you to seek payments for these debts, you should consult a lawyer. In general, the deceased person’s estate (money in savings accounts or other assets owned) will be used to pay off any outstanding amount left behind. This happens before any of the assets are distributed to the decedent’s heirs and beneficiaries.
Cardholders who availed of credit card life insurance will have a portion of their outstanding debt paid off. Credit card insurance may only cover the minimum amount due, or only up to a certain amount, depending on the credit card provider.
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If the estate does not have enough money or assets to cover the debt, the lender may be forced to write off the remaining balance as a loss. There are still particular instances, however, when debt can be inherited after the person’s death. These include:
- Being a joint owner or holder of the credit card
- Being the guarantor on a loan
In case you are in one of the above situations, consider consulting the lender to discuss means to ease the additional financial burden, at least in the immediate term. Some options you can explore include freezing interest or specific fees immediately after the death of the cardholder. Be aware, however, that lenders are not obligated to accept or comply with requests like these.
What should family members do when a credit card holder dies?
To facilitate the settlement and closing of your deceased loved one’s credit card account, follow these steps:
- Inform the lender of the cardholder’s death.
While people are expected to take their time to grieve for the loss of their loved one, it is still recommended to notify the decedent’s credit card provider as soon as possible. In addition to moving matters forward sooner, you can also prevent the bank from sending painful reminders such as account statements and other correspondence to the deceased.
- Provide the lender with a copy of the cardholder’s death certificate and other necessary documents
Furnish a copy of the decedent’s certificate of death and other identification to facilitate the processing of their account. Be prepared to provide the decedent’s name, residential address, bank details, and date of death.
You will also be asked whether the deceased left a will. If so, give the bank the name and contact information of the executor of the estate. If there is no will, the decedent’s next of kin or an administrator appointed by the high court will be tasked to serve this role.
- Wait for the lender’s assessment and release.
The bank will evaluate the decedent’s accounts, including the debt owed under the credit card account. If the decedent also has a savings account in the same bank, this will be used to pay off any outstanding debt. Any amount that remains after the credit card debt is fulfilled will be released to the estate for distribution to the heirs and beneficiaries of the deceased.
What can credit card holders do to protect their family members from financial burden when they die?
If you want to make it easier for your family and loved ones to deal with your financial obligations when you die, here are some deliberate measures you can take:
- Prepare a will
Establish your decisions in writing well before your passing. This is a significant way to facilitate the administrative matters that your loved ones will have to deal with at a difficult time.
- Keep all personal and financial documents organised
Entrust all of your essential personal documents, from your birth certificate to copies of your insurance policies, with someone in your family or a third party like your lawyer.
- Practise financial responsibility
While your family might not be liable to inherit your debt when you pass away, they may still suffer from having fewer of your assets to inherit if most of your estate winds up paying off your outstanding debt.
Put your family in a better position financially by handling your debt responsibly long before you die. Pay bills in full and on time as much as possible to prevent your balance from building up and incurring interest.
Life insurance: Does it cover credit card debt?
Investing in a good life insurance plan is another excellent way to provide your loved ones with sufficient financial security. Life insurance benefits can include coverage for outstanding debt, leaving more money from your estate available for distribution to your heirs. The great thing about life insurance is that it covers more than just your credit card obligations. The circumstances that allow you to claim benefits are not limited to your death, as well. In New Zealand, you can maximise coverage from four major types of life insurance:
- Term life insurance – provides a lump sum to your beneficiaries in the event of your death or when you are diagnosed with a terminal illness
- Trauma insurance – provides a lump sum to help you cover medical expenses for any medical trauma such as cancer, heart attack, or loss of a limb
- Total and permanent disability (TPD) cover – provides a lump sum payment in the event that you become disabled and unable to work
- Income protection insurance – provides a monthly payment if you are unable to work due to serious illness or injury
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