by Gary Foreman
The Debt Next to You
Credit Card Debt after the Death of a Spouse
My children's real father is an alcoholic. He has some very old medical bills that he has only been paying $10 a month towards. If he dies, are the children responsible for the leftover? He doesn't have any assets and doesn't even have insurance to pay for his funeral. He is in very bad health and my daughter has taken over his checkbook and pays his bills out of his disability check. She asked me and I told her that I didn't think they would be responsible but I would try to find out.
Someone once said that you should try to spend your last dollar the minute before you die. Although it's an interesting idea, I'm not sure that it makes for a good financial plan! For most of us, the best plan is one that provides enough money for our life and leaves something to our children as a legacy.
Unfortunately, there are some that are not able to reach that goal. Sometimes through misfortune and other times through decisions that didn't work out. It would appear that Margaret's ex was one of those people.
The good news for Margaret's children is that you cannot "inherit" a debt unless you were a party to it prior to the debtor's death. You must accept responsibility for a debt.
Here's a simplified version of what happens. When a person dies, someone is assigned to handle his or her estate. Usually that person is mentioned as the "executor" or "personal representative" in the will. If none is designated, the state will assign someone.
The estate is used to close out all financial transactions of the dearly departed. First, all final bills are paid. If there are any assets left after that, then the remaining assets are divided according to a will, trust or state law. Be sure to check for life insurance policies. People often have policies that they bought decades ago that are still valid.
If the debts are greater than the assets, then the assets are sold and used to pay as many debts as possible. Secured debts (i.e. mortgage or car payments) come first. Unsecured debts (i.e. credit cards) after. Old medical bills would be unsecured. Any debts that are left after the money runs out would not be repaid and the creditor takes the loss.
Sometimes people try to give away their assets before dying in an attempt to avoid leaving the money to pay debts. Creditors have the right to try to reverse those gifts even after death.
Although Margaret's children are probably in the clear, they need to make sure that they don't accept responsibility unintentionally. That can happen in a number of ways.
If you put money into a joint account, the money is available for either joint member. A common situation is where an elderly parent adds an adult child to their checking account to allow them to write checks to pay bills for the parent. Any money that either of them has put into the account can be used to pay the bills of parent or child.
Joint credit cards are another potential danger. As far as the credit card company is concerned, they can collect the entire account from either person on the account.
So if Margaret's daughter has a joint credit card with her Dad, she will be responsible for any balance after he dies. Even if she never used the card. And, if she doesn't make timely payments, her credit rating will be effected.
You don't need a joint account to be allowed to write checks or make credit card purchases. A signed request by Dad will get check writing authorization or a second credit card.
If there's currently a joint credit card, she should try to get it closed as soon as possible. If the account has a balance, try to transfer it to a new account in only Dad's name.
Margaret's daughter also needs to be careful on how they pay her father's bills. She should not write checks from her account. It's unlikely, but there's no sense giving anyone the idea that she's accepting responsibility for his debts. If she wants to help him financially, she should write a check to him and deposit it into his account.
It's probably a good thing for all of us that parents can't put their children in debt. A lot of us who survive raising teenagers wouldn't be opposed to a little "post-mortem payback" for those troublesome years!
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter or visit Gary Foreman on Google+. Gary is also available for audio, video or print interviews. For more info see his media page.
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