What Happens to Your Credit After Death?
When death comes knocking, you can’t take your money with you. But what about your credit score? If you have bad credit, you may be worried that failing to repair your credit and pay off your debt could affect your family in the long run. Read on to learn about where your credit and debt go when you’re no longer here and how to deal with a loved one’s finances after they pass away.
What you need to know about credit after death:
- After you die, your credit report will be flagged “deceased,” which should prevent anyone from stealing your identity.
- Unpaid debts will come out of your estate, which could rob loved ones of their inheritance.
- Cosigning for a loan or credit card makes you responsible for that debt if the main signatory dies.
- Make things easier by putting your financial information in a file for your family now.
What happens to your credit after death?
While a deceased person has no use for their credit, identity thieves do. It’s important to understand what happens to your credit and your debt after you die so you can prevent financial headaches for your loved ones.
What happens to your credit report
You might assume your credit report gets deleted after you die. However, if the credit reporting agencies were to delete your credit file immediately, that could actually make it easier for someone to steal your identity. Instead, the agencies place a flag on your credit report to indicate that you’ve passed away. Should a credit application ever come through with your information on it, lenders receive a “deceased — do not issue credit” notice. This tells them to stop the transaction immediately and take the appropriate steps to report fraudulent activity.
It’s worth noting that these flags aren’t immediately put in place after you die. Rather, the credit bureaus update credit files using reports of recently deceased persons they regularly receive from the U.S. Social Security Administration. These reports are based on data received from funeral homes, financial institutions, family members and other state and federal organizations — and they aren’t necessarily comprehensive. Reporting the death of a loved one to the three credit bureaus (Equifax, TransUnion and Experian) yourself can reduce the lag time that leaves the door open for fraudsters.
What happens to your credit score
While your credit report sticks around, your credit score does essentially disappear once your report is flagged. According to John Ulzheimer, credit expert and former employee at both FICO and Equifax, a credit report that is flagged with a death notice can no longer be scored because it “fails the minimum credit scoring criteria.” That shouldn’t prevent you from improving your credit score while you can. But it’s not your credit score that will follow you after death. It’s your debt.
What happens to your debt
Debt does not go away when you die, but it does take on a different legal form. Donald H. Sienkiewicz, estate attorney and owner of Estate Preservation and Planning Law Office in Amherst, N.H., explained that as soon as you die, a new legal entity called your “estate” springs into existence. The deceased person’s assets and debts now belong to that estate. This means that generally speaking, the estate — not your relatives — is responsible for your debt.
The big exception in this instance is when someone entered into the debt in partnership with the deceased. Cosigning for a loan makes you legally responsible for the borrower’s debt if they are rendered unable to pay, as does being listed as a joint account holder on a credit card. Some states, particularly community property states, also require spouses to pay certain kinds of debt. The community property states include Alaska (if a special agreement is signed), Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
According to Sienkiewicz, the estate’s assets are typically used to pay funeral expenses first, then administrative and legal costs and then any debts of the deceased. Whatever is left over goes to heirs. If the estate doesn’t have enough assets to pay off its debts, the estate is deemed insolvent and the debts are either negotiated down or left unpaid. Creditors can’t come after relatives for the unpaid debts unless the person signed a legal contract agreeing to be responsible for those debts when they were withdrawn.
But while you aren’t responsible for anyone else’s debt, “you don’t get to grab their assets either,” said Sienkiewicz. If the estate is insolvent, you might not have a claim to the assets you inherited because they’ll need to be used to pay off debt. Marc Guertin, a Connecticut-based estate planning attorney at Guertin and Guertin, has seen this happen. “It’s a bitter pill,” he said, “but a lot of it has to do with a lack of planning or people not getting along.”
Regardless of your debt profile, you can make things easier for your family by setting up a file now that spells out all your assets and debts. That file should also contain your will and who your family should contact to help get your finances in order after your death. You should also address family issues while you still can to avoid disputes between relatives later. “Those cracks turn into chasms,” said Guertin, “and it ends up costing a lot of money.”
What to do if a loved one passes away
If a loved one has already died, you’ll want to make sure their credit report is flagged to avoid potential fraud. If you’ve notified lenders that the borrower is deceased, this has likely already been done. To be certain, you can contact the three major credit bureaus to inquire about flagging their credit report. You’ll likely need to provide the deceased’s Social Security number and a copy of their death certificate.
More immediately, though, you’ll have to locate your loved one’s will and sort through their finances, which might include tracking down assets such as bank accounts, retirement accounts and insurance policies, dealing with lenders they owe and managing funeral plans and expenses.
Guertin warned that after experiencing the death of a loved one, you’re in an “inferior bargaining position” when it comes to things like funeral planning due to your emotional state, so seek the advice of friends, financial planners or estate lawyers if you feel it would help. If the estate of your loved one is particularly complex, Sienkiewicz emphasized the importance of finding a competent attorney who specializes in estate law and, ideally, has experience with insolvent estates.
Just like the possessions you leave behind, your finances often get passed on to your relatives. That’s why it’s best to organize your finances now. If you’re dealing with the death of a loved one, knowing that you’re not personally responsible for their credit or debt should relieve some stress.