What happens to my debt after I die?
Dealing with the loss of a loved one is already a challenging time. Understanding what happens to their debts and then having to deal with the admin thereof can add another layer of complexity.
It's a common misconception that debt simply vanishes upon death. In reality, outstanding debts need to be addressed, and proper planning can significantly ease the burden on your family.
Let’s dive into how debt is handled after death to ensure you adequately plan for the future.
Who pays the debt if I’m gone?
When you pass away, everything you own—your house, car, bank accounts, investments and other assets—becomes part of what's called your estate. Think of your estate as a container holding all your possessions.
This estate becomes responsible for settling your outstanding debts. Creditors (the people or companies you owe money to) have the right to make a claim against your estate to recover what they are owed. If your estate has enough money to cover all the debts, the debts are paid, and the remaining assets are distributed to your beneficiaries (the people you've designated to inherit your assets).
If your estate doesn't have enough cash to cover the debts, assets might need to be sold to raise the necessary funds. This could mean selling a house, car or investments. This can impact the inheritance your beneficiaries receive as they won't receive anything until all debts are settled.
Understanding the different types of debt
Not all debt is treated the same way. You get secured debt and unsecured debt. The type of debt you have determines the order in which it's paid and what options creditors have for recovering the money.
Secure debts are tied to a specific asset, which acts as collateral, such as a home loan and vehicle loan, and are typically paid first from the estate. If you pass away and your family can't afford to continue making payments or pay off the loan, the lender (e.g. the bank) has the right to repossess the asset (the house or car) and sell it to recover the debt.
Unsecured debts are not tied to a specific asset, such as credit card debt, personal loans and student loans. These debts are paid from the estate, but they typically have a lower priority than secured debts. If the estate doesn't have enough assets to cover all debts, unsecured creditors may not receive the full amount owed.
When are you responsible for someone else's debt?
It’s important to understand that in certain situations, you might be legally responsible for someone else's debt, even after they die, for example, if you’ve participated or shared in any of the following:
- If you have a joint account with the deceased (e.g. a joint credit card), you are responsible for the entire debt, regardless of who made the charges.
- If you co-signed a loan for the deceased, you are legally obligated to repay the debt if they can’t.
- If you are married in community of property, you are jointly responsible for your spouse's debts incurred during the marriage.
Why is estate planning important for debt management?
Making provision for debt in your estate means your spouse/partner/heirs aren’t left with the hassles of settling it after you pass away. Similarly, they’ll have the security of knowing that if something happens to you, the home loan or car loan will be covered so they won’t also have to worry about being evicted or not being able to get around on top of grieving.
Estate planning is essential not only to allocate your assets and provide for your family after your death but also to put measures in place to take care of your debt so that your family’s financial security isn’t endangered.
Life cover can help protect your loved ones financially, especially if they are jointly responsible for your debt, and our loan protection plan ensures that the outstanding balance of your personal loan, overdraft, revolving credit plan or student loan will be settled in the event of death so that your assets can be distributed to your heirs and not used to satisfy creditors.
Key considerations for planning
- Create a Will to outline how you want your assets distributed and who will be responsible for managing your estate (the executor).
- Review your insurance coverage as your life insurance can provide a financial safety net to help cover debts and provide for your family.
- Keep a record of all your debts, including account numbers, balances and contact information for creditors. Make sure your executor knows where to find this information.
- Talk to a qualified and registered financial advisor to create a comprehensive plan that meets your specific needs.
Terms and conditions apply
Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).
Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.
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