Many people worry about what will happen to their debts after they die and often they’re concerned that their family members will be responsible for paying off what they owe. Here at Rapid Loans, we want to help you stay informed about your finances, even when it comes to the trickier subjects.
So, let’s dive in and clear up what happens to your debt when you or someone you love passes away.
Essentially, when you pass away your executor is responsible for collecting and distributing the assets of your estate. Firstly, the executor is responsible for determining what debts need to be repaid and paying them using any money or property that’s left behind. Afterwards, the remaining assets are given to the people nominated in the will, also known as beneficiaries.
When You May Be Responsible For Someone Else’s Debt
You may be responsible for someone else’s debt for several reasons but generally, you won’t inherit debt just because you’re related to someone. Phew! However, there are exceptions:
- If you shared a loan or credit card with the deceased, you’re responsible for that debt.
- If the deceased has a secured or unsecured debt in joint names, everyone named on the account is responsible for the debt.
- If one account holder dies, their estate may be used to pay off part of the debt or the joint account holder will be responsible for the whole debt.
- If the deceased account holder has no assets in their estate, or not enough to pay off their share of the debt, then the other joint account holder will have to pay the outstanding amount.
- If you co-signed a loan, you’re responsible for the remaining balance.
Are There Different Kinds of Debts?
Absolutely, there are different kinds of debt and not all debts are created equal for a reason. Here’s a quick rundown of the different kinds you might come across:
- Secured Debts – This is a debt that is secured against a particular asset, such as a mortgage or car loan. When a creditor lends you money, they may take security for the debt. This means that if the borrower stops making repayments and the debt isn’t paid, the lender can take the secured asset and sell it to recover the amount owed. While the beneficiaries of the estate aren’t responsible for the debt, the estate may lose the asset if the loan can’t be repaid.
- Unsecured Debts – This is a debt with no specific asset backing it, such as a credit card, student loan or personal loan. This means that if repayments stop, there is no particular asset the lender can repossess to cover the debt. Instead, the lender has to go to court and get an order to take the borrower’s assets and sell them to pay off the debt. If the estate doesn’t have enough money to pay unsecured debts in the deceased’s name and there’s no guarantor, the debts may not have to be repaid.
What If A Person’s Estate Doesn’t Have Enough Money To Pay All Their Debts?
Death is an inevitable part of life and so is debt, whether it’s a credit card, car or home loan, business finances or university fees. But, what happens when the estate cannot cover a deceased person’s debts?
All estates are different and it depends on the circumstances of the person who dies as to what debts are owed and how pressing payment is for those debts. The first thing an executor should do is understand that it’s their responsibility to check whether there are any available assets and arrange debt payments in order of priority. For example, funeral costs and taxes usually come first. This is then followed by secured debts and then unsecured debts.
If there’s not enough money, the estate is declared insolvent or bankrupt. The executor should then inform any companies or organisations that are owed money about the deceased’s passing and let them know that they suspect the estate is insolvent. The executor may be able to come to an agreement with creditors to waive or reduce the debt.
If there’s no money or assets, unsecured debts usually die with the debtor as creditors can’t chase payments unless there is a co-borrower or joint account holder.
Knowing what happens to your debt when you or a loved one dies can give you peace of mind and help you make informed financial decisions. At Rapid Loans, we’re here to support you. If you have any questions, don’t hesitate to reach out to us.
This article is general in nature and is not intended as financial advice. It does not take into account your own personal or financial situation.