We at AH2 Legal get quite a lot of clients wondering what would happen to their debt after they die. There is a lot of misconception around the issue of debt after death and people thinking that if you die, you no longer owe money to your creditors/lenders.
We get questions such as “When someone dies and leaves behind debts such as a mortgage, credit cards and personal loans, who is responsible for paying it?” or “Are the debts written off by lenders or will family members inherit the debts?”
In this short article, we will be providing answers to frequently asked questions concerning debt after death.
Generally, when a person dies, their assets and liabilities will form part of their estate and pass to the person named as executor in their Will once probate is granted. The general rule is that your debt, whether it be a mortgage, private loans, credit card debt or car loans, will need to be paid back. Your estate (under the control of your executor) is therefore responsible for your debt after you die.
As such, before the executor distributes any assets to the beneficiaries who are named in the Will, he or she must firstly discharge the liabilities of the estate using whatever funds are available in the estate. The executor is authorised to sell both real and personal property to satisfy estate debts. All assets that come into the hands of the executor or administrator are regarded as available for the payment of debt.
Secured and Unsecured Debts
How a debt is handled when a person dies generally depends on whether it is secured or unsecured debt. Secured debt is money that is borrowed against a particular asset, such as a car or a house. If a person is unable to repay this kind of debt, the lender may be able to repossess the asset to recover their loss. Unsecured debt is not secured by any one asset (for example: credit card debt or personal loans), meaning the lender would not be able to sell an asset to cover the amount borrowed. Instead, they may have to use other methods to help recover the money owed. Secured debts will always be discharged by the executor before unsecured debts.
Can my family members keep what I give them in my Will?
If a beneficiary has been bequeathed an asset that was used to secure a debt and the beneficiary wants to retain that asset, then the beneficiary will usually bear the burden of the debt that is attached to the asset. The beneficiary must therefore repay or refinance the secured debt before the asset is transferred to them.
Unsecured debts held solely in the deceased’s name will usually be paid from money held in the estate. If there is not enough money available to repay the debt, then assets may need to be sold to help pay off debts.
If there are not enough assets in the estate to meet all the estate debts, the executor may need to contact creditors to let them know that the debts cannot be repaid, and to ask for the debts to be ‘written off’.
It is important to note that a creditor is not required to write off debts, and if the debt amounts to $5,000 or more, then the creditor may apply to a Court to have a bankruptcy trustee appointed to the estate.
Where the estate is solvent, the first category of assets that should be used to discharge debts are assets that are not effectively disposed of by the Will. However, where the estate is insolvent, then the funeral, testamentary, and administration expenses have priority, and the remaining debts and liabilities will be governed by the laws of bankruptcy.
Will my family members have to pay off my debt?
Family members need not worry about “inheriting debts”, as debts are paid out before family members inherit any remaining assets from the estate.
Family members will only be held responsible for paying off estate debts if:
- the debt was secured against property owned by the family member;
- the debt was jointly incurred by the deceased and the family member (i.e. the family member was a co-borrower); or
- the family member personally guaranteed the deceased’s debt.
Family members will not be held liable for satisfying the debts of a deceased family member unless one of the above circumstances applies.
What if my family member is a guarantor to my debt?
If your family member is a guarantor for your debt, then the guarantor will have to check on the type of the guarantee given. If your guarantor also dies, then it depends on the wording of the guarantee. If the wording of the guarantee specifically states that the guarantee is continuing and not revoked by death or the guarantee extends to the guarantor’s executors or personal representatives, then it will usually survive the death of the guarantor, allowing a creditor to make a claim on the guarantor’s estate. If other circumstances, the guarantee may be cancelled once notice of the death of the guarantor is received by the creditor.
A guarantor to a debt is basically telling a creditor/lender that if something were to happen to the borrower/debtor, then he or she as the guarantor will definitely pay off the debt. As such, it is vital that a guarantor pay careful attention to the wording of any guarantee and carefully consider the consequences of such a guarantee before agreeing to sign on as a guarantor to any debt.
Having further questions about making your Will? Need legal advice for your Will?
Feel free to talk to us now at ☎️(08) 6161 0243 or ? firstname.lastname@example.org for any inquiries.