What happens to your debt afteryoudie?

DEBT can follow one to the grave, and understanding what happens to your liabilities such as your home loan or vehicle financing facility after you die is critical to any estate plan. What happens to your debt depends, to an extent, on the solvency of your estate, the type of debt owed by your estate, the nature of your marriage regime, and the terms of your will.

In the event of a person’s death, their assets and liabilities are transferred to a deceased estate, and the estate and the appointed executor is then responsible for paying off debts and distributing assets according to the will’s specifications.

Sebastien Alexanderson, founder and debt counsellor at National Debt Advisors, says that how debt is dealt with after death is largely informed by whether the debt is secured or not. “Secured debts are those that are guaranteed against specific assets. These are tangible items that were taken as security for loan repayments, so if payments cease, a financial institution can sell these assets to recover the amount owed.”

For example, on a car loan, the debt is secured against the car, so the car would be repossessed to recover the outstanding debt on it.

“Unsecured debts are the opposite of this,” he says. “There is nothing attached to the debt and, if payments were to stop, a creditor would not have anything to repossess. If the creditor claims against the estate, the executor of the estate may have nothing to liquidate towards paying off this debt,” he says.

Alexanderson says the repayment of unsecured debt is dependent on whether there is enough money or assets to service the debt in the deceased estate. In other words, if the estate cannot settle the debt through the sale of assets, the debt is extinguished. It is not “inherited” by the heirs.

“While collection agencies may try to convince the heirs that they are legally required to pay the debts with their own money, the fact of the matter is, unless they were a co-signer to the debt, no one else has to pay anything towards the unsecured debt of the deceased.” Inheriting someone’s unsecured debt is only possible if the estate is dissolved and distributed before the debts are settled, Alexanderson says.

Wouter Fourie, chief executive of Ascor Independent Wealth Managers, says important aspects to consider are estate duties and executor fees. “Fees are levied on the value of assets prior to debt being taken into consideration,” he says.

All assets and liabilities are listed in a liquidation account, Fourie says, and the executor needs to advertise the deceased estate in the government gazette and/or other local publications to notify potential creditors, if any outstanding credit agreement exists, to lodge a claim against the estate. It is the executor’s responsibility to settle all the debts lodged against the estate where possible.

Fourie says there is also a pecking order in the settlement of debts. The South African Revenue Service (SARS) is usually first in the queue, followed by banks where a mortgage is still registered.

“So it would be a mistake to think that debt can be inherited, or is the responsibility of beneficiaries,” he says.

When the deceased’s employer or pension fund provides death benefits or a life policy is in place, the designated beneficiaries will receive a lump sum directly into their bank accounts. These payouts can not be considered or allocated to the estate’s debt, or be included in the amount considered for estate duties or executor fees.

Fourie says, however, that the beneficiaries can choose to settle outstanding debts of the estate to prevent the estate from being declared insolvent.

There are numerous investments and savings vehicles one can use to make sure a healthy financial legacy is left to loved ones. But risk benefits such as life insurance or credit life cover should form part of any estate plan. While investments focus more on building wealth over the long term, combining them with life and disability cover or having a credit life policy to cover unsecured debt in an event of an emergency, remains essential.