What happens to my debts after I die?
The question of how and when debts are repaid upon death can be complex to answer as it largely depends upon the deceased’s individual asset and liability structure.
In this article, I explore the key factors concerning debt repayment upon death. I also look at what your legal responsibilities are when acting as an executor of an estate with debts.
The general rule
Typically, a person’s debts and any funeral or testamentary liabilities must be repaid out of the Estate before it can be distributed to the beneficiaries.
For example, if a person leaves behind a credit card debt or balance owing on a loan, the debts must be repaid out of the Estate first. If there are insufficient cash assets in the Estate, other assets such as any real estate may need to be sold and the proceeds of sale put toward repaying the debts.
Once the debts have then been repaid, the Estate can be distributed to the beneficiaries in accordance with the Will or in accordance with the laws of intestacy if the person has died without a Will. To learn more about what happens if you die without a Will, see our article ‘What is a Will and why do I need one?’
Exceptions to the rule
It’s important to note that in some instances the above rule does not apply, including but not limited to:
- When superannuation forms part of the Estate: Payments from regulated superannuation funds, even when paid to the Estate, will usually not become available for the repayment of debts. Accordingly, even if there are insufficient assets in the Estate other than superannuation, the superannuation benefit paid to the Estate will not be available to meet such debts unless the Will expressly stipulates to the contrary.
- If the debt is held jointly with another person: If the debt is held jointly with another person, this will usually mean that both borrowers are jointly and severally liable to meet the debt. Accordingly, if one dies, the responsibility for the entire debt passes to the survivor. A common example of a jointly held debt are mortgages where a couple have taken up a home loan together. In this instance, if one borrower dies, the debt does not form part of their Estate and therefore would not be paid out of their Estate funds.
- If the debt relates to a specific gift made in the Will: If a debt is secured by an asset gifted in the Will, unless otherwise stipulated in the Will, the debt will follow the asset. For example, if I gift my house at 1 Apple Street, Fruitville to my brother in my Will and I have a mortgage on that property, the debt of the mortgage will follow the gift of the house instead of being paid out of my residuary Estate. If he cannot afford to absorb the debt (by repaying it outright or transferring the mortgage into his own name), then the house will be sold, the mortgage repaid, and the balance of the proceeds of sale distributed to him in accordance with the gift in the Will.
Who is responsible for repaying debts?
If you have made a Will, your Executor will be the person responsible for attending to repayment of the debts of your Estate. If you have not made a Will, the person responsible for attending to repayment of the debts will be the person appointed by the Court to administer your Estate (i.e. the person to whom Letters of Administration have been granted).
Your Executor must first and foremost collect your assets together and then repay your debts from the assets in your Estate. Your Executor is not required to repay your debts out of their own money, unless they have some direct involvement with that debt (i.e. the debt is secured against a property that they own or, they have personally guaranteed the debt).
What if there are insufficient funds in my Estate to repay my debts?
In some instances, it is possible for other people in your life to become responsible for repaying your debts after you have died.
One example of this is when your debt is secured against an asset owned by another person or when someone has guaranteed your loan. In these instances, the other person is responsible for meeting the debt repayments in the event you fail to do so. If there are insufficient funds in your Estate to repay the debts, this may result in the creditor enforcing the security or guarantee.
If there are insufficient funds in your Estate to repay the debt, and there are no other persons liable to meet that debt, then insolvency principles will apply. As prefaced above, insolvency principles may apply even when there has been a superannuation benefit paid to the Estate.
Where the Estate is insolvent and debts remain unpaid, it is prudent for the Executor/Administrator of the Estate to seek legal advice about seeking a waiver of the amounts outstanding.
I’m an Executor of an Estate with debts: what should I do first?
When administering an Estate, particularly where liabilities are involved, it is important to get proper legal advice at the outset as to how best to manage those liabilities.
As an Executor, you are under a legal obligation to preserve and maximise the value of the Estate. For this reason, it is paramount that debts are handled appropriately. Executors should always ensure to:
- Locate all relevant paperwork so that they are aware of all assets and debts of the Estate;
- Notify creditors of the deceased’s passing and request that debt recovery be suspended pending the administration of the Estate; and
- Engage a solicitor to provide full and complete advice about the Estate’s liability to meet the debts and how best to administer the Estate.