Nothing is scarier than debt! But what happens to your debt if you should die? If you think it will disappear, think again. Taking control of your debt while you’re alive should be your first plan of action. We often think that we will never get out of debt and just give up the fight.
But what does happen to the debt once you pass on?
1. Your assets could be liquidated
If there is a will, an executor of the estate as nominated in your will, will be appointed. Their main job is to locate the property and money left behind (called the ‘estate’) and pay off all debts and liabilities before distributing the remainder to the beneficiaries stated in the will. If there is insufficient liquidity or cash in the estate to pay all your debts, the executor of the estate will be forced to sell the assets in your estate to settle your debts possibly leaving nothing available for distribution to your loved ones.
2. Determining if the debt is secured or unsecured
Secured debts are debts that are secured against particular assets. When a bank lends you money, they may take security for the debt. That means that if you stop making repayments, the bank can take certain property (called the security property) and sell or use it to recover the amount you owe. If the debt is unsecured and you stop making repayments, there is no particular asset the bank can take and sell or use. The bank must go to court and get an order that your valuables be taken and sold to pay off the debt. Credit cards and personal loans are usually unsecured debts.
3. Determining whose name the debt is in
If your debt is shared with another, i.e. credit card debt shared by spouses or business partners in their own names, it is the responsibility of all names listed on the account. If one account-holder dies, it may become the responsibility of the joint-account holder. Alternatively, if one account holder dies, their estate may be used to pay off a portion or all of the debt. If the deceased account holder has insufficient (or no) assets to liquidate in order to pay their portion or all of the debt, the other account holder/s will be forced to pay all outstanding debt.
4. Is your debt guaranteed?
If you have named a guarantee on a loan, it will become their responsibility, should you be unable to make the repayments. This can be a tricky position to put a loved one in, as they are promising to pay all debt if the borrower stops making payments. Depending on the type of asset (secured or unsecured), the bank will chase your guarantee, should you pass away. If the debt is secured, an asset will be liquidated to pay all outstanding debt.
Why not speak to a financial adviser should you need life cover, a will or just to discuss your financial situation.