What happens to my debt after I die?
When someone passes, their debt doesn’t automatically go away because money is still owed, and outstanding amounts still need to be paid. That’s why it’s important to plan and prepare for the practicalities to protect your loved ones. If provision hasn’t been made to settle the debt, those remaining could be left in a complicated situation with unnecessary financial and admin burdens.
Who is responsible for paying it back?
Upon your death, everything you own (e.g. your home, vehicle, money in accounts and investments) forms your estate. Your estate then becomes responsible for settling your debts, and those you owe have the right to claim and get paid from your estate.
If there are sufficient funds to cover all the debt, then the estate will be settled, but if there isn’t enough available money in the estate, assets might have to be sold to pay the outstanding amount(s). This could affect the financial security of your beneficiaries as they won’t receive any inheritance until all the debt is paid and the estate is wound up.
The type of debt matters
Not all debt is the same; the type of debt you have will determine the priority in which it gets paid and what your creditors can do to recover the amount owed.
With secured loans, such as home loans and vehicle loans, your house or car is used as collateral, and if you pass away and your family can’t afford to take over the repayments or pay it off, the bank will take it back and sell it to pay the debt. These debts get settled first.
Unsecured loans, such as credit card debt, personal loans and student loans, don’t require collateral, and the debt will have to be paid from the estate.
When are you liable for someone’s debt?
You could be responsible for the debt if you shared or partook in it. For example:
- If you have a joint account, such as a credit card, you have a responsibility for the debt, and if the other person dies, you are obliged to make the payment
- If you co-signed for a loan, the debt is also in your name
- If you are married in community of property, you are jointly responsible for your spouse’s debt
Why is it important to plan how your debt will be handled?
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.