What happens to debt after you die?
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It's not the easiest question to think about, but understanding what happens to your debt after you die can make a big difference to the loved ones you leave behind. Many people assume that debts simply vanish when they die, but that's not quite the case.
Often what happens is that family and loved ones are left trying to sort this out if there isn't a clear plan in place. One the upside, a deceased's debt does not pass on to the surviving family members, unless married in community of property or they have joint debt.
Debts don't disappear
When a person dies, any debts they have don't simply disappear – they become liabilities for their estate. The estate includes everything that person owned, such as property, savings, investments, and any other assets.
An executor, who is often a trusted family member or appointed professional, is responsible for managing the estate. This means the executor must use the estate's assets to pay off any debts before distributing what's left to the beneficiaries.
This process can involve selling assets like property, cars, or other valuables. If the estate doesn't have enough money to cover the debts, the estate may be considered insolvent, meaning creditors may not get fully paid. That is a matter for the executor to sort out and is not an obligation that family members need to settle.
Secured vs unsecured debt
The way debts are handled after death can depend on whether they are secured or unsecured. Secured debts are loans tied to specific assets, like a mortgage on a house or finance on a car. The asset itself serves as collateral, so if the estate doesn't have enough money to pay off the loan, the property or car may have to be sold.
On the other hand, unsecured debts – like credit card balances and personal loans – aren't directly linked to any specific asset. These debts will also be settled using the estate's remaining assets.
If there isn't enough to cover them, creditors may have to write off these debts. The important point is that family members won't inherit these debts unless they were co-signers or joint holders of the loan.
What happens if there is joint debt?
If you've taken out a loan jointly with someone, such as a spouse or partner, the surviving person is generally responsible for the remainder of that debt.
This is quite common with mortgages and car loans. So, be sure to check the terms of any joint agreements you have, because they can affect what your loved ones might need to do after you're gone.
Planning for your loved ones
Estate planning plays a big role in making sure your loved ones aren't burdened by your debts. By organising your affairs and making plans to cover your debts, you're giving relieving your family of the stress of managing these matters after you're gone.
Life insurance policies, for instance, can be used to settle debts without having to sell off property or other assets. These policies can ensure that the family home or other meaningful possessions don't have to be liquidated to pay off creditors.
Making an estate plan and keeping it updated regularly is a good practice that ensures all your assets and debts are accounted for, and your loved ones aren't left in the dark. Keeping everything well-documented helps executors manage the estate smoothly and in line with your wishes.
How to help your family avoid difficult decisions
The best way to ensure your loved ones are protected is to be prepared. Estate planning is a tool that lets you clearly state how you want your assets to be used to settle any outstanding obligations, whether it's a mortgage or a credit card.
In either case, it's always a good idea to discuss your plans with your family or a trusted friend, so they understand your wishes and aren't caught off guard.
You can take that a step further by speaking to professional consultant about estate planning to really put your mind at ease. With a plan in place, you can reduce the burden on those you leave behind and make sure your legacy is one that helps, not hinders.
* Roné Stipp is a para-planner to André Basson and Suzean Haumann rone@brenthurstwealth.co.za
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