A question that has always plagued you; what happens if you die with your debt? Here we discuss the four ways this could be handled.
Published: Monday, January 30th 2017
With debt piling up around your ears, you may be fearful about what could happen to your family in the event of your death.Taking control of your debt today would be your first plan of action. We often think that we will never get out of debt and just give up the fight. In our article, 7 Debt-Busting Steps To Live By we talk about how to get out of debt in a realistic and cost-efficient manner.
4 Ways Your Debt Is Dealt With After Death
Typically, if the deceased leaves behind debt there are a few things that need to be considered first.
1. Assets Liquidated
If there are any assets (property or money) remaining that can be used to pay off debt, this will be used. If there is a will, an executor of the estate will be appointed. Their main job is to locate the property and money left behind (called the 'estate') and pay off all debts and liabilities before distributing the remainder to the beneficiaries stated in the will.
2. Determining Whether The Debt Is Secured Or Unsecured?
A secured debt is a debt tied to an asset, such as a house. If a bank lends you money for a mortgage bond, the security they take for the debt will be the asset itself. This is a debt that is secured against a particular asset.If you stop making repayments, the bank is liable to take the 'security property'. They will then sell it to recover the amount that is owed.
An unsecured debt is credit owed that is not tied to any asset. This becomes problematic for the bank, as there is nothing they can take and sell. If you stop making these repayments, the bank will be forced to obtain a court order, which allows your valuables to be taken in order to settle your debt.
3. Determining Whether The Debt Is In Your Name Or Joint Names
If your debt is shared with another, i.e. credit card debt shared by spouses or business partners, it is the responsibility of all names listed on the account. If one account-holder dies, it will become the responsibility of the joint-account holder. Alternatively, if one account holder dies, their estate may be used to pay off a portion of the debt.If the deceased account holder has insufficient (or no) assets to liquidate in order to pay their portion of the debt, the other account holder/s will be forced to pay all outstanding debt.
4. Determining Whether Your Debt Is Guaranteed
If you have named a guarantee on a loan, it will become their responsibility, should you be unable to make the repayments. This can be a tricky position to be in as you are promising to pay all debt if the borrower stops making payments.Depending on the type of asset (secured or unsecured), the bank will chase your guarantee, should you pass away prematurely. If the debt is secured, an asset will be liquidated to pay all outstanding debt.
If you have an outstanding loan when you die, which is secured against an asset owned by you, the lender can take that asset if repayments on the loan stop. So, although your friend or family member is not technically responsible for your debt, the estate may lose the asset if the loan can’t be repaid. If the secured loan is in joint names, unless the co-borrower maintains repayments, it may be repossessed.