If the unthinkable were to happen to you, the last thing you would want is to shackle your loved ones with unpaid debts. So, it is important to know exactly what happens to your debts when you die. We’ve talked before about what happens to your HECS-HELP debts when you die, and the good news is that just like with HECS, if you can’t pay a debt at the time of your death, it will usually not transfer to your next of kin. There are a few exceptions, and they depend on a variety of factors, including your assets and the type of debt.
Paying Off Outstanding Debts
When a person dies, the executor of their estate is responsible for paying off any outstanding debts using assets left behind by the deceased. If there is not enough cash to pay off the debts, the executor must sell property or other assets to cover them. If the deceased still does not have enough money left, even after selling all assets, then the debts are usually forgiven.
Other people are only responsible for paying the debts of the deceased if:
- The debt is secured against a particular asset that is owned by someone else
- The debt is in joint names with someone else
- Someone has guaranteed the debt
A lender cannot force your family members to pay your debts after you have died unless one of these circumstances applies.
Debts That Persist
If you have a debt in joint names – e.g. a credit card debt – then everyone whose name is on the account is responsible for the debt. If one account holder dies, the other holders must still continue to pay off the debt as usual. If the deceased account holder has no assets in their estate, or not enough to fully pay off their share of the debt, then the other account holders will have to pay everything that is outstanding.
Additionally, if someone has guaranteed a loan for you – that is promising to continue repayments if you stop making them – then that person is still responsible to repay that loan after your death.
If you have an outstanding debt when you die which is secured against a particular asset – e.g. a car – the lender can take that asset if repayments on the loan stop. So although your next of kin is not technically responsible for your debt, the estate may lose the asset if the loan can’t be repaid.
By knowing what debts persist after death and how you can manage them, you can ensure that you’re not leaving your family with a large financial burden after your passing.