Ask Liz Weston

Get smart with your money

Credit & Debt

Q&A: Medical debt liability and separation

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Dear Liz: You recently answered a question about whether one spouse can be held responsible for the other’s credit card debt. My husband and I are separated and he recently was diagnosed with cancer. He is unemployed with no health insurance and high hospital bills and back child support payments. In the event of his death, will I be liable for his debts?

Answer: You need to talk to an attorney to determine your liability for his medical bills, since it depends on state law. Some states don’t hold spouses liable for these bills if they’re legally separated, while others do. In any case, his estate will still owe the unpaid child support, and child support typically has a higher priority for payment than most other creditor’s claims when an estate is settled. In general, creditors have to be paid before the rest of the assets can be distributed to heirs.

Q&A: Credit card debt and surviving spouses

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Dear Liz: You’ve answered a number of questions regarding credit card debt when a person dies. But I haven’t quite seen the answer I need. If a spouse dies, and the remaining spouse is not on the credit card account, is it still the responsibility of the survivor to pay the card? Does the answer vary by state? Or is it a federal law?

Answer: As you read in previous columns, the dead person’s assets are typically used to pay his or her debts. If there aren’t enough available assets to pay the creditors, those creditors may be able to go after the spouse in certain states and certain circumstances.

In community property states such as California, debts incurred during a marriage are typically considered to be owed by both parties. Other community property states include Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In the rest of the states, a spouse’s debts are his or her own, unless the debt was incurred for family necessities or the spouse co-signed or otherwise accepted liability.

Collection agencies have been known to contact spouses, children and other family members and tell them they have a legal or moral obligation to pay the dead person’s debts, regardless of state law. If you are married to someone with significant debt, contact an attorney to help you understand and perhaps mitigate your risk.

Q&A: Who is responsible for credit card debt after death?

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Dear Liz: My mother, who is widowed, has credit card debt. When she dies, are my sister and I responsible for that debt? There is no estate, but she does have a small amount of life insurance that mainly would go toward her funeral expenses and fixing things in her home to get it ready for sale.

Answer: If your mother owns property, then she has an estate. If she has any equity in the property when she dies, some of that equity might have to be used to pay her debts.

You and your sister, however, are not responsible for your mother’s debts. The life insurance also does not have to be used to pay debts if your mother names a beneficiary (or beneficiaries) for the policy and at least one of the people named outlives her. In that case, the insurance proceeds would go directly to the beneficiaries, bypassing the probate process.

If she doesn’t name a beneficiary, the insurance proceeds may be included in her estate and used to pay her final bills, including credit card debt.

If your mother can’t pay what she owes, she should consider talking with a bankruptcy attorney about her options.

Q&A: Debt obligations and voluntary surrender

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Dear Liz: My husband returned a car to the dealer when he lost his job. Now the company says he owes it more than $7,000 (the difference between what he owed to the dealer and the price for which the car was sold). He refuses to pay any amount, but recently he received a letter from a law office demanding payment or they will take him to court. Is he obliged to pay this money? What options does he have to get rid of this debt?

Answer: A debt doesn’t disappear simply because someone decides not to pay it.
Your husband signed loan paperwork to buy the car, and this paperwork obligated him to repay a certain amount. Voluntarily surrendering the car didn’t change his obligation. Also, the surrender probably is being reported to the credit bureaus as a repossession, which is a big negative mark on his credit reports. Some people mistakenly believe that a voluntary surrender avoids credit damage. Typically, it does not.

Your husband could make matters worse if he continues his stubbornness. The law firm can take the collection to court, where it’s likely to win. That will add a judgment to your husband’s credit files and cause further damage to his scores. His wages could be garnished to pay the debt.

Your husband may be able to settle this debt for less than he owes, especially if he can offer a substantial lump sum, but negotiations with a collector can be tricky. He may want to consult an attorney for help or at least arm himself with more knowledge about what to do from sites such as DebtCollectionAnswers.com.

If this is just one of a number of unpaid bills, though, you both may benefit from talking to a bankruptcy attorney about your options.
In the future, keep this experience in mind when you go to buy another car. Making at least a 20% down payment and limiting the loan term to four years or less will help ensure that you’re never “upside down” like this again.

Q&A: Forgiving credit card debt

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Dear Liz: Recently you wrote about debt being forgiven after seven years, but in your book “Deal With Your Debt,” I’m sure you said after four years credit-card debt is usually not collectible. Could you clarify? When I tell debt collectors about this, they merely laugh.

Answer: That’s understandable, because there is no forgiveness for most debt. It’s legally owed until it’s paid, settled or wiped out in Bankruptcy Court.

Each state sets limits on how long a creditor has to sue a borrower over an unpaid debt. Those limits vary by state and the type of debt. In California, credit card debt has a four-year statute of limitations. Creditors may continue collection efforts after four years; they’re just not supposed to file lawsuits.

Seven years is how long most negative marks, such as unpaid debts, can remain on your credit reports. Technically, most unpaid debts are supposed to be removed seven years and 180 days after the account first went delinquent.

Q&A: Credit cards vs student debt. Which should be paid off first?

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Dear Liz: I have $8,000 in savings. Should I use it to pay the accrued interest on federal student loans that go into repayment soon? Or should I pay credit card debts of $662 at 11.24%, $3,840 at 7.99% and $3,000 at 6.99%?

Answer: Pay off the credit card debt. The interest isn’t tax deductible, and balances you carry on credit cards just eat into your economic well-being.

Your student loans, by contrast, offer fixed rates, a wealth of consumer protections and tax-deductible interest. You needn’t be in any rush to pay them off, particularly if you’re not already saving adequately for retirement and for emergencies. Federal student loans offer the opportunity to reduce or suspend payment without damaging your credit scores should you face economic difficulty and the possibility of forgiveness. Those aren’t options offered by credit card issuers.

If your student loan payments exceed 10% of your income when you do go into repayment, you should investigate the federal government’s “Pay as You Earn” program, which offers more manageable payments for many people, especially those with large debts and small incomes.