What happens to debt when I die?

What happens to debt when I die?

Unlike the more esoteric about what happens to a human’s soul after death, the answer to the question posed in the title to this article is far easier to answer. But more on that shortly.

Some of us may find it morbid to contemplate shuffling off our mortal coil, but there is one certainty for all of us, and that is death. Over the years I’ve heard so many people rack up personal debt and say “Oh, it doesn’t matter. When I die it all goes away!”

Unfortunately it is exactly the opposite. When you die your debt doesn’t.

In the simplest case, if you have personal debt that is unsecured against any assets, your executor (or administrator if you don’t have a will) is legally required to sell or convert your assets, and from the cash that’s realised from the assets, pay off your debts. This means that your executor needs to go through your personal records and advise banks and other creditors that you’ve died. Once all funeral and other expenses are paid for, the executor needs to consider who has extended you credit, how much is owed and work out an arrangement to pay off the debts.

Now, this is where things can be a little tricky. Sometimes you might owe money jointly with a spouse or life-partner for a personal debt, such as a credit card. When you die in debt, the creditor simply looks to the surviving spouse to be liable for the debt as if you weren’t even an issue. You simply drop out of the scene and the executor doesn’t have to worry, unless the surviving spouse pays for the debt and seeks half from your estate.

What about a situation where someone, say a parent, has guaranteed a loan and you die owing money to the creditor. Again, the creditor simply asks the executor for a pay-out and when that can’t be done, the executor simply enforces the debt against the guarantor.

Similarly, where an asset has been used as security so that a creditor can extend a loan, it would be open to the creditor to simply take the asset if the executor can’t enter into any satisfactory arrangement. The asset is usually disposed of and any shortfall between what the net realisation proceeds are and what is owed is then sought from the executor.

Finally, where a deceased estate has insufficient assets to pay off all debts, unless the creditors involve agree to forgive all debts owed, things can get really messy. The Bankruptcy Act contains provisions on dealing with these situations and then lawyers need to be called in.

The moral of the story is to ensure your financial affairs are in order, you have a recent will, and a trusted executor who understands your financial position.

Arthur Athanasiou, Partner – Thomson Geer and President of the Tax Institute

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