When a loved one passes away, the last thing most people want to think about is what to do with their finances. During times of grief, emotion can easily cloud decisions making it difficult to make sensible financial choices. If appropriate, getting a handle on your loved one’s financial situation before they die can help ensure their estate is properly managed when they pass away. And as uncomfortable as it can be, that includes discussing any debts the person may have.
At Property Clearance, we know how daunting it can be to manage a deceased estate. That’s why we have put together this guide to what happens to the debts of a deceased person. It covers what happens to the debts, who is responsible for managing the debts, and provides some guidance around when beneficiaries may be responsible for debts left by the deceased.
What happens to the debts of a deceased person?
Unfortunately, when a person dies any outstanding debts they had when they were alive, still need to be paid. These debts will be paid out of the deceased person’s estate. This is an important step in the execution of the will and must occur before any assets in the estate can be distributed to beneficiaries.
Usually, if there is enough money left over in the estate, the debts are paid off with this first. However, if there is not enough money to cover the debts in their entirety, they must be repaid with the proceeds from the sale of assets in the estate (e.g. property, shares and personal belongings such as antiques and jewellery etc.). If after all available assets have been exhausted there are still debts outstanding, these may not need to be repaid.
Are beneficiaries responsible for debts left by the deceased?
Many people worry that their loved ones may be responsible for their debts when they pass away, and often ask us ‘are beneficiaries responsible for debts left by the deceased?’ However, beneficiaries are not usually responsible for debts left behind by the deceased. This is because the debts are paid out of the deceased person’s estate. So, while family members and friends may inherit less money or fewer assets if these need to be used to cover outstanding liabilities, they are not personally liable for the debts.
However, there are some exceptions to this rule. There are three scenarios where another person may be responsible for the debt:
- If the debt is secured against an asset that is owned by someone else.
- The debt is in a joint name with someone else.
- Someone else has guaranteed the debt.
Below we use some simple examples to explain what could happen in each of these scenarios. For simplicity, we’ve chosen examples involving a married couple—Ron and Sandra—where Ron has passed away. Note that these examples are not intended to provide financial guidance; they are for illustrative purposes only.
Scenario 1: debt is secured against an asset owned by someone else
If the deceased person has an outstanding loan secured against an asset owned by someone else, that person may lose their asset if the loan repayments cease. This is because the lender can acquire ownership of the asset to recover the debt.
In this scenario we assume Ron had an outstanding loan against the house he owned with his wife Sandra. In this instance, if the loan cannot be repaid in full from money and other assets within the estate, Sandra may be required to sell the house to repay the loan.
Scenario 2: debt is in a joint name with someone else
If a debt is in joint names, this means that everyone on the account is responsible for the debt. If one of the people responsible for the debt passes away, their estate can be used to pay off their part of the debt. However, if the estate does not have a sufficient amount of money or assets to cover their share of the debt, the other person responsible for the debt will have to pay the remaining amount.
Take for example, a scenario where Ron has a joint credit card account with his wife Sandra. After Ron dies, Sandra will become fully responsible for paying off the credit card debt.
Scenario 3: someone else has guaranteed the debt
When a debt is guaranteed, this means that another person has made a legally binding agreement to repay the debt in the event that the borrower defaults on the debt. This means that if the borrower passes away, and the debt cannot be repaid with money or assets from their estate, the guarantor will need to repay the outstanding portion of the loan.
Say for example, Ron had a guarantee for an unsecured car loan from his brother Jim, that he hadn’t finished repaying before he died. In this instance, if the outstanding value of the car loan cannot be repaid from Ron’s estate, Jim will be personally responsible for repaying the debt.
Is the executor responsible for the deceased debts?
The executor of an estate is the person chosen by the deceased to carry out their wishes in managing their estate, and is responsible for the administration and distribution of assets to beneficiaries, according to the deceased person’s wishes.
As part of their role in managing the deceased person’s estate, the executor of the will is responsible for organising the repayment of any debts. This leaves many people asking the question, is the executor responsible for the deceased debts?
However, just like the family and friends who may benefit from the estate, the executor of the will is not personally liable for any of the deceased person’s debts. They are simply responsible for ensuring the correct processes are followed for the debts to be repaid through the estate.
What is the difference between the secured and unsecured debts of a deceased person?
It is important to understand the difference between a secured and unsecured debt, because this has implications for how the debt will be repaid out of your loved one’s estate.
Put simply, a secured debt is a debt where the borrower has provided an asset as collateral for the loan. Mortgages and car loans are common examples of secured debt. In these instances, if the borrower defaults on the loan, the lender can seize the property or car to sell it and recoup the outstanding value of the debt. Any secured debts a deceased person may have are typically repaid first. If there is enough money in the estate to cover the debt, this will typically be used to repay the debt. However, if there are insufficient funds, the asset against which the loan was secured, may need to be sold to repay the debt.
As the name suggests, an unsecured debt is the opposite of a secured debt. There is no collateral against the loan—instead, the lender provides the funds entirely on the basis of the borrower’s credit worthiness and promise to repay. Credit cards and personal loans are common types of unsecured debt. Because there is no asset against the loan, if the borrower defaults on the loan, the creditor must seek a court order to sell the borrower’s assets to recoup the debt.
How does a debt claim against deceased estate work?
Just like a person can claim they have wrongly been left out of a will, a creditor can make a claim to be owed money by the deceased person. As part of the process of distributing debt repayments to creditors, the executor of the estate may advertise for creditors to come forward with claims against the estate. These advertisements are not required in all jurisdictions, but they can provide protection against future claims. These notices typically ask creditors to provide evidence of their claim and submit it within a certain time period.
Other things to keep in mind
Unfortunately, executing a will and managing the debts of a deceased person, can be a complicated and time-consuming process. It is particularly difficult when, as is often the case, the executor of the estate is a close relative of the person who died. Here are some other things to keep in mind that can make the process a lot easier:
- If it is appropriate for you and your loved one, it can be a good idea to sit down with your loved one before they get too sick, to better understand their financial situation. Building a picture of their current assets and liabilities, and discussing how they want their estate to be distributed, can help to ensure that you execute their will in a way that respects their wishes when the time comes.
- If you and your family have a particularly complex financial situation, it’s always best to consult a solicitor or financial adviser. They will be able to provide helpful guidance about how to structure your debts and assets before your loved one passes away to minimise the impact on other family members.
- Always remember that there are numerous resources out there to help you through the process of executing a will.
Sources
- Debt Negotiators, 2022, What happens to your debt when you die?
- Cancer Council, 2019, What happens to debts after death?
- Genders and Partners, 2022, What to do when someone dies with debts