What Happens to Your Debt When You Die?
No one’s sure if there’s life after death. But debt after death? This one is a concrete fact.
If you think your debts will magically disappear and be easily forgiven after you pass away, you’re dead wrong. Whatever happens, the creditor will always get back what is owed to them.
What’s more terrifying than passing away is dying with unpaid debts. You’ll worry about what will happen to your loved ones in case you perish. What happens to your debt when you die? Is debt transferable after death? Are beneficiaries responsible for debts left by the deceased?
These are the questions that may be running through your mind. You’ll find the answer to these questions next.
It’s a common misconception that debt is transferable after death. There is no truth in the belief that beneficiaries will be responsible for the debt left by the deceased. As a general rule, your debts are not to be shouldered by anyone.
Rest assured that your beneficiaries won’t suffer from the debts you haven’t paid. This will only happen if the debt is co-signed by them which we will be discussing shortly.
Processing Your Debts after Death
The first thing that will happen is that your death will be reported to the Master of the High Court (simply called ‘Master’). This will be done by the executor.
The executor will be required to post the news of your death and have it circulated within the district. The purpose of this is to notify any person you’re indebted to and give them time to file a claim against your estate within a 30-day time frame.
Below are the other processes your debts will undergo after your death.
The nominated executor will fulfill the commands you listed on your will if you have one.
The executor’s job is to locate all your assets, including properties, monies, vehicles, and other investments. All these items are referred to as the ‘estate’ of the deceased. The estate will be used to pay off all your debts first before distributing what’s left of it to the beneficiaries included in your will.
If you do not have a will, your estate will be used and distributed in accordance with the law regarding inheritance. Your estate will be dealt with in a manner consistent with the Intestate Succession Law, wherein you don’t have control which asset will be inherited by whom.
Are there any exceptions on how the estate can be used? What debts are forgiven after death?
The only time your debt will be written off is when there’s still an outstanding balance left even after your estate has been used to pay for the loan. The remaining amount is forgiven in this situation. Your beneficiaries won’t have to pay the remaining amount but there will be nothing left of your estate for them to inherit.
Identification of secured and unsecured debts
In paying off any outstanding debts you left, secured loans are given priority over unsecured ones.
Since you’re dead and you’ll be unable to pay off the loan, your lender will consider this as a loan default. Any collateral you’ve provided for the loan will be seized. Creditors can liquidate it to recover the remaining amount you owe them.
For unsecured debts, lenders can’t seize any asset right away since you didn’t offer any form of security to avail the loan. The bank or lending company will have to go through a lengthy legal process in order to obtain any property you have that they can use to pay off your debt. The same thing happens to credit card debt when you die since it’s a form of unsecured credit.
Dealing with the co-signer
If your debt is co-signed by another person, whether they’re your spouse, children, or business partner, they will take full responsibility for the loan after you pass away.
For example, you availed a loan and your spouse is a co-signer. When you pass away, lenders will have your assets liquidated to pay off your debt. If the value of your assets is insufficient to pay off all your debts, the co-signer will pay the remaining amount. In case you don’t have any asset to liquidate, your spouse has no other choice but to shoulder the whole debt by themselves.
It’s best to remove your loved ones as co-signers to your debt to avoid giving them a hard time in the future. You wouldn’t want them to mourn for your passing and at the same time bury them in debt you left.
It’s in your best interest to create a will and appoint a professional executor you can trust who will handle your wishes once you’re gone. If you appoint a family member who doesn’t know anything about the process that takes place in this kind of situation, they’ll most likely hire a lawyer anyway.
The best thing you can do is settle all your debts on time or as soon as you can to save your family from the hassle of dealing with debts after death.