The concept of debt inheritance often raises concerns among Australians, as many worry about the financial burdens they may leave behind upon their passing or the potential responsibility for a loved one’s debts.

Who will pay for the credit card bills?

What about the mortgage? The car loan?

This is why we will examine the fundamental principles of debt inheritance in Australia, delving into the intricacies of the legal framework to offer clarity and reassurance for those confronted with the possibility of inheriting or bequeathing debt.

Can you inherit someone’s debt?

Can debts be passed to beneficiaries?

To address this concern, let’s define the legal concept of “debt inheritance” and how it works in practice in Australia.

Debt inheritance is the idea that when a person passes away, their outstanding debts may impact their estate and, by extension, their beneficiaries. This is true to some extent, but it’s crucial to clarify that you do not inherit debt per se. Instead, the deceased person’s estate is responsible for settling any outstanding debts.

What is an estate?

An estate refers to the sum of an individual’s assets, property, and financial interests at death. This typically includes real estate, personal property, bank accounts, investments, insurance policies, and other valuables.

The estate is subject to various processes, such as settling outstanding debts, taxes, and administrative expenses, before the remaining assets are distributed to the beneficiaries according to the deceased person’s last will or, in the absence of a valid will, per intestacy laws.

The estate executor manages these assets and ensures that any outstanding debts are paid off. This process involves identifying and valuing the assets, paying off any outstanding debts using the assets available, and then distributing the remaining assets to the beneficiaries as specified in the deceased person’s will or according to intestacy laws if no valid will exists.

Who are the executors?

Executors are individuals or institutions appointed to carry out the terms and manage the affairs of a deceased person’s estate according to their last will and testament. They can be family members, friends, attorneys, or professional trust companies, depending on the preferences of the person creating the will.

How can you be affected by your deceased loved one’s debt?

If the estate’s assets are sufficient to cover the outstanding debts, the executor will settle the debts, and you, as a beneficiary, will receive your share of the remaining assets.

However, if the estate’s assets are insufficient to cover the debts, the estate may be declared insolvent. In such cases, the executor will use the assets to pay off the debts as much as possible, and you may not receive your intended share or get nothing at all.

Generally, you won’t be held personally responsible for the deceased person’s debts unless you are a co-signer or guarantor of a loan or have joint debts with them.

In other words, while debts do not pass directly to beneficiaries, the outstanding debts of a deceased person can impact the value and distribution of their estate. So you should be aware of this potential impact and consult with a legal professional to understand your rights and obligations in the context of debt inheritance.

What kinds of debt can be inherited?

While the deceased person’s estate is responsible for settling outstanding debts before assets are distributed to the beneficiaries, the type of debt—secured or unsecured—can impact how these debts are treated during the estate administration process.

Are secured and unsecured debts treated differently?

Secured debts are loans backed by collateral, such as a mortgage for a house or a car loan. If the deceased person had outstanding secured debts, the creditor has a claim on the collateral, which may need to be sold to settle the debt.

If the estate has sufficient assets to cover the debt, the executor can pay off the secured debt, and the asset can be passed on to the beneficiary.

If the estate cannot cover the debt, the executor may sell the collateral and the proceeds used to pay off the loan. In some cases, a beneficiary may take over the secured debt and continue making payments to retain the asset.

On the other hand, unsecured debts, such as credit card debt or personal loans, are not backed by collateral. When dealing with unsecured debts, the executor is responsible for paying them off using the assets in the estate.

If there are enough assets to cover these debts, they will be paid, and the remaining assets will be distributed to the beneficiaries.

If the estate is insolvent and cannot cover the unsecured debts, the debts usually die with the debtor, and the creditors bear the loss.

It’s important to note that if you are a co-signer or guarantor or have joint debts or accounts with the deceased, you may still be responsible for the deceased person’s debts, regardless of whether the debts are secured unsecured.

What loans are forgiven at death?

Besides unsecured loans, certain loans may be forgiven or discharged upon the borrower’s death. The specific terms and conditions for loan forgiveness depend on the loan agreement and the lending institution’s policies.

A common example is HELP (Higher Education Loan Program) debt. HELP debts, which include HECS-HELP, FEE-HELP, VET FEE-HELP, VET Student Loans, and SA-HELP, are typically cancelled upon the death of the borrower. The Australian Taxation Office (ATO) writes off these outstanding debts and does not pursue them from the deceased person’s estate.

Do I have to pay my spouse’s credit card debt when they die?

In Australia, debts are considered separate unless jointly incurred or guaranteed. Hence, you are not personally responsible for your spouse’s credit card debt when they pass away unless certain conditions apply.

When a person dies, their individual debts become the responsibility of their estate. The executor of the estate is responsible for paying off any outstanding debts–including credit card debts–using the assets of the estate before distributing the remaining assets to the beneficiaries.

Do you inherit your spouse’s debt when you get married?

Debts incurred by an individual before marriage are typically considered separate and remain the responsibility of the person who incurred them. Unless, again, you’re a guarantor or a co-signer.

Still, it’s essential to communicate openly with your spouse about financial matters and understand your individual and shared financial responsibilities when entering a marriage.

In case of doubts or concerns, consulting a legal professional can help you navigate financial issues and debt management within your marriage.

Can debt be inherited in other countries?

Generally, when a person dies, their debts do not automatically become the responsibility of their family members or heirs, regardless of whether the debts were incurred in Australia or another country. Instead, the deceased person’s estate is responsible for settling any outstanding debts.

In the case of debts incurred in other countries, the estate administration process may become more complex due to differences in legal systems, jurisdictions, and international laws. The handling of such debts will depend on the specific circumstances, the type of debt, the laws of the country where the debt was incurred and any applicable international agreements.

As with domestic debts, there are some exceptions to the general rule. For example, if you are a co-signer or guarantor of a loan, you may be held responsible for the debt, even if it was incurred in another country. Similarly, you might be liable for the outstanding amount if you are a joint account holder or have a joint debt with the deceased person.

Get Debt Help Today

If you need help with debt relief or are seeking guidance on managing inherited debts, don’t hesitate to contact Debt Negotiators. Our experienced team is ready to assist you in finding the best debt solutions tailored to your specific circumstances.