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Question:

I was put in touch with a friend of a friend whose mother is unfortunately in the final days or weeks of a terminal cancer. Her attorney advised her not to pay her mother’s outstanding credit card bills. Do you have any thoughts about that?

Response:

If your friend’s mother is short on money, the lawyer may be thinking she’s “judgment proof,” meaning that even if she or her estate was sued, there would be no money to pay the credit card company. It’s the old adage that “you can’t squeeze blood from a stone.” Your friend’s mother may have limited resources and in deciding what to pay for during her last days, the banks should perhaps be on the bottom of the list.

If your friend or her mother tells the credit card companies the situation, they are likely to waive the debt. What gets complicated is that when they do so, they take the loss as a deduction on their taxes and send the credit card holder a 1099 for the same amount as income. So, while the debt could be erased, depending on her other income, the mother may have some taxes due as a result. Of course, the taxes are only a percentage of the reported income.

If the credit card bills are still outstanding after the mother’s death, they will become debts of her estate. If her estate does not have enough funds to pay all its obligations it is considered to be “insolvent.” Each state has rules that govern the priority of payment of debts of insolvent estates.

It’s also possible that the lawyer is taking a more aggressive stance. Every state has a different system for creditors to bring claims against states. By way of example, my state of Massachusetts makes it relatively difficult. Creditors here have one year from the date of death to bring a claim and they can do this only by filing suit against the estate. The lawyer may be guessing that the credit card companies won’t be able to get around to doing this in time or decide that it’s not worth the effort. In addition, if all the mother’s accounts are joint or have named beneficiaries, they will avoid probate, making it even more difficult for creditors to come after the estate for payment.

However, even if this approach could be successful, it does not seem like right if the mother can afford to pay the bills. We should all pay our obligations. Otherwise, the social structure begins to fray.

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