June 25, 2014
How To Cope With Credit Card Bills After A Family Member Dies
Whether you’re rich or poor, famous or obscure, if you have a will, chances are it says something to the effect of, “pay my debts before you pay my heirs.” Your executor or personal representative — the person or institution you have named to carry out your wishes — must follow those instructions in accordance with state and federal law.
In my post, “Heirs Left With Unpaid Bills May Inherit More Grief Than Gold,” I describe how some family members get stuck with gigantic tax bills and lingering legal battles that can eat away at an inheritance. For more garden-variety obligations, it may be much easier negotiating to pay less than what’s owed. Though banks don’t want to publicize this fact, lawyers say clients have had considerable success reducing credit card debts after a family member passes away.
“One way to reduce your credit card debt is to die,” says Marc S. Bekerman, a lawyer with his own practice in Woodbury, NY. Credit card companies “will take settlements from the estates that they wouldn’t take from a living person.” He’s sometimes been able to shave off one-third to one-half of a credit card tab by promising to pay immediately. Unlike with a living person, when someone has died, there’s no longer the risk that not paying the credit card bill will hurt his or her credit rating, he notes. So card companies have less bargaining power and may therefore be more amenable to compromise.
In addition, an offer by the estate to pay two thirds – or even half – of the balance immediately avoids the need for card companies to deal with collection agencies. The collectors get paid a commission, of up to 50%, based on the age of the debt and difficulty of finding contact information (which often becomes more challenging after someone dies).
The federal Fair Debt Collection Practices Act, which prohibits debt collectors from using abusive, false or misleading tactics to collect a debt, applies to heirs, as well as consumers. But collectors push the limits of what the law allows, Bekerman says, suggesting to heirs that they have a moral obligation to pay up. “’Your mom had a $10,000 credit card bill. Don’t you think the card company is entitled to be paid?’” they might say.
Legally, if mom didn’t have sufficient assets to pay these bills, her heirs are not generally obliged to make up the shortfall. If you’re an executor or personal representative, though, there’s a risk in the form of fiduciary liability: the prospect of being held financially responsible for distributing assets to heirs before paying certain creditors.
Executors must follow state or federal guidelines about the order in which to pay creditors. State law offers some protection with what’s called a creditor period – a certain length of time (ranging from two months after the start of probate to five years from the date of death) after which the executor can pay beneficiaries without worrying about creditors’ claims, explains Harvard Law professor Robert H. Sitkoff. What effort, if any, they must make to notify creditors, depends on the state. But if you pay heirs before the end of the creditor period — maybe your relatives are clamoring for their cash — and a new bill emerges, you could be on the hook for what you paid other heirs.
Executors who are also beneficiaries have a built-in conflict, since money paid to creditors reduces their inheritance, Bekerman notes. To avoid problems down the line and make sure they are on the firmest legal footing, they should always “wear the white hat,” he says.
For starters, locate all the credit cards and cancel them as soon as possible to prevent new, unauthorized charges. Check the person’s wallet, desk and dresser drawers for both cards and recent receipts. To make sure you haven’t overlooked any cards, contact the three major credit reporting bureaus (TransUnion, Equifax and Experian), which allow the executor to get a free copy of the credit report. Other basic steps, to locate these bills and others, include getting mail forwarded or, for people who have gone paperless, getting access to their e-mail accounts.
If for some reason the bills fall through the cracks, you might soon hear from the card company – or, more likely, the bill collector. That’s your cue to negotiate, though the banks for obvious reasons, would rather this not get around. “We don’t want to encourage people or their family members to run up a credit card bill thinking that it dies with them,” says Nessa Feddis, senior vice president, consumer protection and payments, at the American Bankers Association, a trade group. “That could be in moral hazard,” especially if it involves a caregiver who feels entitled to extra compensation for dealing with a difficult elderly or infirm person.
Tempting as it is to stiff the card companies, sometimes conscience — and potential repercussions — intervene. A widow who discovered that her late husband had left behind a $30,000 American Express bill, initially asked Bekerman to negotiate it down, even though she had plenty of money to pay up. Then, afraid it would affect her own relationship with the card company, she had a change of heart.