Debt after death: Dealing with an estate which has debt

This is a slightly morbid post, and our heart goes out to anyone who’s suffered the loss or death of a loved one. No one likes to think about their own death or that of a loved one.

That said, there are measures today that can be implemented so your financial situation is improved. This can reduce unnecessary stress for your family during a difficult time.

A common question we get is: How are debts treated after the death of the debtor? We’ll do our best to answer this with an Australian perspective.

Please note: This is general advice and we recommend seeking the services of a professional solicitor or state trustee for remedial action. Both can provide a personalized approach to your unique situation.

Debt after debt: Who’s now responsible?

The family members of a person who has died with debt generally aren’t responsible for paying the deceased person’s debt in Australia. This is a different case in other countries, such as the United States.

That said, you may be liable if you’re a co-borrower or you signed a guarantee. Passing away with debt could affect someone’s estate, and precisely how much equity is left over for loved ones.

Two types of debt

There’s generally two types of debt in Australia. Secured debt, and unsecret debt.

  1. Secured debt is where you’re borrowing against a real asset. This includes a house or car. In the case of a death, where the secured loan cannot be repaid by family or estate, then the lender has the right to reposes the asset. They’ll effectively sell it to recover the money owed.
  2. Unsecured debts are other types of loans that aren’t backed by assets. This includes credit cards and personal loans. In the case of the debtor passing away, the lender may be able to obtain court orders to pay off the remaining balance from the estate.

Certainly the second option is a not a good one. I personally think it’s a little morbid and unfair on the family. Luckily, most banks won’t do this, but some will. This is why we’re an advocate of being debt free.

Debt after death
There are some debt collectors that want your money no matter what!

Creditors actually have priority over beneficiaries. That is – the bank is more important than the family of the deceased. Very much unfair! Luckily, most people today do have life insurance.

Family responsibility

There’s a responsibility on you, as the individual, to ensure you don’t put your family through this heartache upon your passing. Some scenarios are out there whereby you can be held accountable for covering a deceased person’s debts.

These include:

  1. Those who are signed as a joint account with the deceased (and at least one person is still alive)
  2. Those that have signed as a guarantor agreement for the life of the debt
  3. If the loan was secured using the asset that the person who’s still alive jointly owns.

Most lenders do have a heart. They understand the difficulty that these situations present. Some will offer some leniency by way of eliminating fees or interests, though under Australian law, they don’t have to do this. Nor should you expect it either. They are debt collectors after all.

The Death of Debt

Here at The Debt-Free Community, we’re advocates of getting (and staying!) out of debt for the lifetime. If you’re concerned about your debt affecting your family, then there are ways to reduce your debt starting today.

You can talk to an adviser. Our recommended team actually offers a 100% FREE phone call with no obligation to go forward. That is – there are no out-of-pocket expenses even if you decide to go a step further with us, just like thousands of Australians have done.

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