There is a well known saying and it goes like this. There are only two things in life you can’t avoid: death and tax. Some would point to companies like Google and argue that tax can be avoided, but death? There’s no avoiding that one.
You may think that your estate planning is in place with a funeral plan or a Will to help your family better manage your affairs when you’re gone, but did you remember to plan ahead when it comes to your credit card debts? It isn’t uncommon for us to spend several thousand dollars per month, especially if you are playing the rewards points game. Do you want to bequeath your family and loved ones with a financial headache when you’re gone?
Death and Credit Card Debt
If you think that leaving your death to take care of your credit card debt is a solid plan – after all, you would stop spending on the card – you could actually be leaving your family to pay for the costs of your bad debt. The way that credit card debt is handled after death changes with legislative differences across our borders, however, in most cases the amount needed to clear your credit card debts when you die will be taken out of your estate or the assets you wanted to leave to your family.
Once the amount of your credit card debt has been deducted from the value of your estate, your beneficiaries will be given access to whatever is left – if anything. Alternatively, your estate and assets won’t be enough to cover the total of your credit card debts when you die, in which case the bank has to write off the debt as a loss. Of course, the bank wants to avoid writing off the debt, and will look at every other possible avenue, as they may also be the same institution which holds your savings account, transaction account, home loan or other controllable assets – a commonplace scenario in Australia. However, before the bank can start using your assets to pay off your credit card debt, they must first go to court to obtain an order to allow your assets to be sold to pay off your debt.
Different Credit Card Debt Structures
In other cases your credit card debt doesn’t die with you or need to be settled in the event of your death, for example, when you have a joint credit card account, or your partner or another family member is a cosignatory on the card. On a joint credit card account, when one of the account holders dies, the other becomes automatically responsible for the full amount of the debt.
Typically credit cards are an unsecured debt, which means you don’t provide any security to the bank, in the way that your property is the security for your home loan – which is what qualifies you for a lower interest rate on your home loan than on your credit card. However, if you choose to secure your credit card against your property or other asset, that asset can be used to pay off your debt when you die. If your family don’t want the property or asset to be sold to pay off your credit card debt, they will be required to find other funds to clear the debt.
Death and Other Debts, e.g. Home Loans & Personal Loans
In the event that you have other debts you are leaving behind when you die, such as a home loan or a personal loan, you won’t usually have to worry about your family being forced to pay them off, but the settlement of these debts could easily eat into their inheritance.
When you die, the executor of your Will divides up your estate and assets according to your wishes. It is also the responsibility of the executor to make sure all creditors are paid, and this is done first by using any cash in your estate, and then by selling property or other assets to cover the debts. If there is not enough money in the estate, the creditors may write off the debts.
Again, a loved one or family member may have to take responsibility for a debt such as a home loan, if the loan is in joint names, or if a loan of yours is secured against an asset owned by someone else, for example, if your sister has signed as guarantor on your home loan or personal loan. Therefore, your family members will need to have a plan in place in case of your death, because if loan repayments cease after your death, the lender is able to take possession of the property and sell it to cover the remaining costs of the loan.
How to Settle Debts After Death
When you die, your creditors don’t automatically know about the circumstances of your death and the situation of your estate, and there can be some paperwork and running around for your family to do in order to keep control of, and close down your credit cards. The bank will need to see written proof of death in the form of a death certificate, after which your family should ask that interest on the card be frozen, or the interest rate reduced, so that the debt doesn’t keep growing, while the account settlement is organised.
To close out assets such as bank accounts, family members will again need to provide proof of death in the form of a death certificate, medical certificate, funeral bill or a letter from the coroner or your solicitor. They will also need to provide adequate identification of themselves and their relationship to you, before they can be given control of your accounts. In addition to identification and certification of your death, in order to close assets or accounts, your beneficiaries will usually need to provide:
- A letter of administration or probate.
- Details and proof of the authorised representative of the estate, for example a solicitor or the executor of the estate.
The documentation submitted to the financial institution will then be assessed, and your family member or representative will be sent an overview of your assets and accounts, from which they can instruct the institution of their wishes for the funds. It is also important to remember that when a credit card or bank account has been cancelled or closed after death, this does not automatically notify any direct debtors.
The Role of Life Insurance
We tend to treat death as something that won’t affect us, but it is a condition that affects 100% of us. You may not already have life insurance, but if you don’t, it may be time to get a quote. A good life insurance policy will pay out upon your passing away so that your loved ones can pay off whatever debt is owed. There are many providers of life insurance policies in the market. Consult with your personal financial advisor, who can help you find the best policy for your needs.
What Should You Do with Existing Credit Card Debt?
You may be in perfect health right now, but you don’t know what will happen one second from now. If you have outstanding credit card debt, pay it off. Use this as extra impetus to get debt free. If you need more guidance and tips, here are some articles from our blog and learning centre:
- The Debt Snowball Repayment Plan Explained: This debt repayment strategy is well known as an effective technique for reducing debt quickly.
- Balance Transfer Calculator: Balance transfers are one of the best ways to reduce the expense of your debt by reducing interest rates and freeing up cash to pay off what you owe. Our calculator will graph out your savings over time and compare it to what you would pay without transferring your balance.
As you can see, there is a wealth of financial details your family would need to be able to manage and close off your debts after your death. Therefore, as part of your estate planning or as an attachment to your Will, it can be valuable to include all bank account usernames, account names and passwords, credit card numbers and passwords, as well as a list of bills which are paid by direct debit from your accounts, to allow family members to easily follow up and close your accounts, and all other financial obligations after you’re gone.
And with that, here’s something to ponder:
The wicked borrows and does not repay, But the righteous shows mercy and gives. Psalm 37:21
Don’t be a selfish fool and leave a financial mess for your family to clean up!