Laws on Death & Credit Card Debt

A loved one's death can leave a family grieving and in shock--it can also result in frequent telephone calls from credit card companies requesting payment on the deceased's credit card debt. Depending on the type of account the deceased held, however, the credit card company may not have the right to demand payment from family members. Consumer protection laws exist to regulate creditors' rights to collect after an account holder dies.

Joint Account Holders

If the deceased shared an account with another person, that individual automatically inherits the responsibility of paying off the full balance of the credit card--regardless of whether he made the purchases. The credit card company may turn the credit card account over to a collection agency, file a lawsuit against the joint account holder or make negative reports to the credit bureaus should he fail to pay the deceased's credit card debt. Authorized users, however, are not joint account holders and are not legally liable for paying the credit card debt.

Collection Through Probate

If no joint account holder exists, credit card companies must file a claim against the deceased's estate. The executor of the will then pays off debts in a priority order. Typically, secured debts, such as vehicle loans and mortgages, are at the top of the priority list. If any assets are left over after the executor pays off secured creditors, those assets will be allocated to unsecured creditors such as credit card companies. In some cases, the deceased's estate runs out of assets before the credit card company receives payment. In this case, the credit card company has no choice but to charge off the debt and claim it as a tax loss.

Timely Settlement

In the past, when someone died, credit card companies could continue to add interest charges and fees to the account--inflating the amount that the deceased's estate must ultimately pay. The Credit Card Accountability, Responsibility and Disclosure Act (CARD Act) of 2009 put a stop to this practice by forcing credit card companies to stop adding additional charges to a deceased person's debt as soon as they receive formal notification of the event, typically through a death certificate and an official balance request from the will's executor. The credit card provider then has 30 days in which to provide the executor with the card balance.

Consumer Protection

Although the deceased's family members aren't liable for the debt, that doesn't stop credit card companies from trying to collect. A 2009 "New York Times" report states that some credit card companies train debt collectors in grief counseling to increase their odds of coercing family members into making a payment. The Fair Debt Collection Practices Act (FDCPA) contains a provision to protect consumers from debt-collector harassment--whether or not they owe the debts in question. Under the FDCPA, a person may notify the credit card company in writing that her relative is deceased and she no longer wishes to receive any contact from the creditor concerning the debt. The credit card company must comply with the person's demands or risk violating federal consumer protection laws.

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Mortgage Forgiveness Debt Relief Act of 2007 & Debt Cancellation

Individuals who receive forgiveness or cancellation from their home mortgage loans must report the discharged amount as income on their tax returns and pay federal taxes on the amount to the IRS. The Mortgage Forgiveness Debt Relief Act of 2007 is a federal law proscribing certain tax rules for individuals receiving discharges from their mortgage debts.

Background

The Mortgage Forgiveness Debt Relief Act of 2007 makes mortgage debt cancellation from a person's primary home exempt from taxation. As of March 2011, the act's provisions apply only to debts forgiven during the years of 2007 through 2012, according to the IRS. The act's tax exemption does not apply to discharged mortgage debts resulting from lender services not related to a decline in the value of an individual's home or services performed for a mortgage lender.

Amounts

The act allows homeowners up to $2 million of tax exemption (as of 2007) for loan cancellation from their primary residences' mortgages. However, married people filing separate tax returns receive a maximum exemption amount of $1 million, as of 2007. Although canceled mortgage debt falling below these amounts are exempt from taxation, individuals must still report them to the IRS when they file their regular yearly tax returns.

(Note to CE: the IRS website is unclear as to whether it is individuals or married filing jointly -- it doesn't say. I just changed it to say "homeowners." However, this website "http://www.IRS.gov/pub/IRS-pdf/p4681.pdf," page 8, seems to suggest the $2 million limit applies to both individuals and married people filing jointly.)

Forms

Individuals receiving mortgage debt discharges will receive IRS Form 1099-C from their mortgage lenders. This form will state the amount of canceled debt in box 2. A person should enter the amount shown on their 1099-C form on boxes 2 and 10 on IRS Form 982, the canceled debt return form. When filing their taxes, individuals receiving discharges from mortgage debts must attach Form 982 to their annual federal income tax returns.

Considerations

If individuals receive mortgage debt forgiveness in excess of the aforementioned dollar limits, they may still receive tax exemption for the extra amount under the IRS' insolvency clause.The IRS considers a person legally "insolvent" when the amount of her total liabilities, such as credit card debt or student loans, exceeds the value of her total assets, such as cash income or home equity. Additionally, individuals may receive tax exemption for their excess canceled debt by filing for Chapter 11 bankruptcy protection.

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How to Reduce Your Credit Card's Interest Rates From Debt Counseling

Counseling is an excellent way to address problems with credit card debt, the Federal Trade Commission points out. Many credit counseling agencies, such as those associated with Consumer Credit Counseling Services, specialize in restructuring credit card debt, including the lowering of interest rates. The initial consultation for a debt counseling session is usually free. However, a monthly fee will be required if the counseling service manages your credit card accounts on an ongoing basis.

Instructions

1

Gather copies of the account statements for all of your credit cards.

2

Make an appointment with a credit counselor approved by the U.S. Department of Housing and Urban Development. Visit the HUD website to find a counselor near you (see Resources).

3

Show the HUD counselor your credit card statements with the balances and the interest rates. Ask the counselor about formal debt management plans, which allow the counseling agency to take full control of your credit card debt and pay your monthly credit card bills. There is a monthly management fee for this service. If you simply want the counselor to negotiate lower interest rates on a one-time basis, ask about the cost for that.

4

Enter into an agreement with the counseling agency for either a complete debt management plan or for a one-time assignment contacting your card companies to request lower interest rates. Get all the terms and conditions in writing. Sign the agreement authorizing the counseling agency to represent you in discussions with your card companies.

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How to Get Rid of Zombie Debt: Get Rid of That Old Debt Once and For All

Are old debts that have been settled, now coming back to haunt you? Are collection agencies contacting you regarding debts from 1982? You may be a victim of zombie debt and its time to stand firm and get rid of those pesky debts once and for all.

Instructions

1

Zombie debt is simply debt that are the result of mistaken or stolen identity, debts that have been settled through bankruptcies, or debts that have run surpassed there statue of limitations.

So if these debts are settled through one method or another, why are they coming back to haunt consumers? Simply, collection agencies don't care. They sell debts from one collection agency to another. And each new collection agency will try to collect on those newly purchased debts.

2

When first confronted with a zombie debt, don't acknowledge that it belongs to you even if you know it does.

3

If it does belong to you, check out the statue of limitations in your state. If the debt is more than 7 years old, you want to ignore the collector. Don't acknowledge the debt is yours, don't acknowledge that you have been notified of the debt, just go on about your business.

If you acknowledge the debt and agree to pay it, then the statute of limitations starts all over again. And now instead of removing this old debt from your credit report, it is placed on there again for another 7 years (depending on the state you live in), which can actually hurt your credit.

4

If this is debt is one that was settled as a result of bankruptcy or was a result of identity theft, you can a) provide the collection agency with documentation to prove this, or b) ignore them.

If you have filed bankruptcy you want to get a discharge order from the courts which will protect you from any zombie debts. You can provide the collection agency with a copy of it.

If this debt is past the statute, you may want to ignore them and watch your credit reports for any entries they may add. If they try to add a negative entry send the credit bureau a letter stating the statute of limitations is up and the matter was settled, and give them 30 days to take it off your report.

5

If you don't owe the debt you can also send the collection agency a letter, certified mail, demanding that they stop contacting you.

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Statute of Limitations on Debt Collection in Kansas

Every state has its own laws that govern how long creditors can go after debtors who have not paid their debt, collectively known as statutes of limitations. The Kansas statute places specific limits on debt collections based on the kind of debt pursued. Always speak to a qualified Kansas attorney if you need legal advice or have questions about Kansas debt collection statutes.

Time Limits

The Kansas statute of limitations on debt differentiates between different kinds of debt categories, according to Kansas Statutes Annotated section 60-511 et. seq.: oral contracts, open-ended accounts, written contracts and promissory notes. Oral contracts are any contract that the parties enter into without writing the agreement down, while written contracts have a written document that formalizes the transaction. Open-ended accounts are debts such as lines of credit, while promissory notes are written contracts with a specific promise to pay. The time limit for oral contracts and open-ended accounts is three years while the limit for promissory notes is five years and the limit for written contracts is six years.

Time Limits

The Kansas statute of limitations states that the creditor must bring an action to collect on the debt with a specific number of years, which means that the creditor must file a lawsuit in court asking the court to grant a judgment in the creditor's favor so he can collect on the debt. Even if a creditor tries to collect on the debt by, for example, hiring a credit collection agency to try to persuade the debtor to pay, this does not stop the statute of limitations or extend the time the creditor has to file a lawsuit.

Judgment Limitations

The state of Kansas also limits how long a debtor can take to collect on a debt for which she has already sued and won a judgment. This statute of limitations only applies to judgments, meaning the creditor must have taken the debtor to court and received a judgment ruling in the creditor's favor from the court. In Kansas, anyone who wins the judgment has five years to initiate a collection of action. After this time, the judgment holder is barred from collecting.

Choice of Law

Creditors often include choice of law provisions whenever entering into a credit agreement with a consumer. These provisions allow the creditor to select the laws of the state that will govern any debt collections or conflicts arising out of the agreement. For example, credit card companies commonly include a choice of law clause that selects estate where there is no effective statute of limitations for collections. So, even though the creditor lives in Kansas, the Kansas statute of limitations do not necessarily apply if there is such a choice of law provision as part of the contract.

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How to Write a Contract for a Debt Pay Off

In the United States, the total amount of personal debt people have stood at over $2 trillion in 2009, as reported by the Money-Zine website. Revolving debt (e.g., student loans) make up the majority of this debt. According to Mindy Fetterman and Barbara Hansen of USA Today, young people thus are the hardest hit and have increased their debt since 2006. These statistics show that debt contracts--contracts that detail how and when a person will repay a loan--are an increasing necessity.

Instructions

1

Write out your name and contact information, flush left, at the top of the page.

2

Write out the name of the person to whom you are lending, along with her contact information, flush left.

3

Write "Contract for Debt Repayment" without quotes, centered.

4

Write a sentence or paragraph in which you define yourself as the Lender and the person to whom you are lending as the Borrower. Use these terms throughout the rest of the contract. In this same paragraph, write out the amount you have lent and that both parties acknowledge this is the true amount of the debt owed. Include the date on which you are lending the money.

5

Indicate the terms of interest, such as, "Borrower agrees to pay interest at a rate of six percent on the unpaid balance of the loan." Keep in mind that you may opt to forgo interest charges for a specified period and that you may include a clause in which interest will increase in the instance of repeated missed payments.

6

Write out a paragraph or sentence that explains when a full or partial payment will be due. For example, write, "The Borrower agrees to pay [sum] on the first of the month until the debt is paid in its entirety." If you plan to have a grace period, explain how many days the borrower will have before penalties are applied. Specify the exact amount you will charge in penalties, and explain the methods of payment. If you are accepting checks, include a penalty for insufficient funds.

7

Indicate the date when the entire loan is to be paid off in full; if the contract allows for partial payments, simply divide the total amount of the loan by the number of payment periods (e.g., months) to calculate how long it will take the borrower to repay you. Specify that you are entitled to demand any unpaid balance on the loan on that date, including any outstanding penalties.

8

Specify that, as the loan contract is a legal agreement, you can and will pursue legal action to collect the debt if the borrower fails to meet his obligations. Clarify that the borrower, not you, will be responsible for any expenses incurred as a result of trying to collect the debt.

9

Create lines for both you and the borrower to sign the contract, as well as a line to indicate the date on which the contract was signed.

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Should I Pay Off My Second Mortgage or My Credit Cards First?

When choosing between bad options, choose the one that harms you least.

I Could Lose My Home

Your second mortgage, if you get into financial trouble, could cost you your house. Your credit cards, no matter how bad your finances get, can't put you out on the street, though they can wreck your credit rating if you go too long without paying them.

My Credit Card Bills Are Higher Than My Mortgage

If you're paying more on credit cards than you are on the second mortgage each month, it's worth it to trim the fat off of your expenses and run that credit card bill down to nothing--then retire the card. Debt consolidations may be worth exploring in this instance.

Bottom Line

Unless your mortgage is "upside down," where the total debt owed exceeds the value of your home, you are almost always better off paying off the second mortgage ahead of paying off the credit cards if you have to make a choice between the two. If you are capable of paying both debts off, put extra money toward paying off the one with the highest interest rate.

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