An individual debt, or personal debt,
is an obligation that just one person agrees to repay.
This type of debt is also described as debt that is
"entered" or "taken" in just one name without another
person's participation. For instance, when you apply
for a credit card by completing the application with
just your signature, you are personally agreeing to
repay any debt that is properly incurred with that
While living, the sole borrower is
the only person required to repay an individual debt;
the lender does not have the ability to require someone
else to make payments towards that debt.
Just as when a borrower is living,
another person cannot be held accountable for the
borrower's personal debts after his or her death.
This also remains true even though a person may be
related to the deceased debtor, whether by blood or
For instance, Cliff dies with a
credit card that has a $5,000 balance. If this
card was opened and held solely in Cliff's name and used
solely for his benefit, the credit card company cannot
require his wife, Claire, to pay off the balance with
her individually owned assets.
However, it is important to note that
all voluntarily incurred debts, such as credit card
charges, are contractual and controlled by the terms
established by the company. If another person is
added to the account as an authorized user, depending
upon the company specific terms, he or she may be
agreeing to repay all of the debt when using the card.
Repayment By Estate
The fact that Cliff's family isn't
obligated to pay his debts with their own assets doesn't
mean that the debts are simply forgiven at his death.
Cliff's estate is obligated to pay the credit card
balance or as much of it that can be paid before the
estate is entirely depleted of assets.
Each state has laws that establish a
legal order for the payment of estate obligations, which
includes disbursement to beneficiaries or heirs.
This order typically involves payment
of burial and funeral costs, expenses of the final
illness (hospitalization, medication, etc.), probate
fees, and death taxes. These items are paid prior
to the payment of any regular, unsecured debts.
Once these priority obligations are
satisfied, the estate generally begins paying the
unsecured debts. Finally, after all debts are paid
the assets that remain in the estate, if any, are
available for distribution to the beneficiaries or
Suppose that Cliff has a $25,000
estate and the costs of his burial, final medical
expenses, and probate fees are $7,500, $8,000 and
$3,000. Once these items are paid, Cliff's estate
has $6,500 remaining.
Following the statutory order of
priority, the $6,500 in Cliff's estate will be applied
to any outstanding, unsecured debts. With $6,500
remaining, Cliff's estate can pay the full amount of his
$5,000 credit card debt.
If this $5,000 credit card is Cliff's
only remaining debt, once it is paid there will be
$1,500 left to distribute among his heirs.
Now suppose that Cliff has the same
expenses, but his estate is valued at $20,000 (which is
$5,000 less than in the example above). After
paying the same costs of burial, medical expenses, and
probate fees Cliff's estate will have just $1,500
Again following the statutory order,
the $5,000 credit card debt must be paid next.
Although Cliff owes $5,000 in credit card debt his
estate only has $1,500 to pay these costs. In this
instance, Cliff's estate is insolvent because its
obligations exceed its assets. The estate will pay
the entire $1,500 towards the $5,000 credit card debt
and the remaining $3,500 of credit card debt will simply
The credit card company cannot pursue
the deceased's heirs for the payment of the remaining
balance of unpaid debt, even though the estate does not
have enough money to pay the debt in full.
However, when an estate doesn't have sufficient assets
to satisfy all of its debts, it also won't have any
assets to distribute to the deceased's heirs.