What Happens to Your Debt When You Die?

If you happen to pass away, you might not be sure about what exactly happens to your debt.

It’s the unthinkable and sad reality of life: We all die. As morbid as it is, we need to talk about how it relates to your family after you pass.

It’s vital to know exactly what will happen, especially as you don’t want to place unnecessary burdens and responsibilities on those you love.

We’ve got the answer to the question you’re looking for regarding your debt obligations when you pass away, including potential recovery action.

There is some good news and we’re happy to share it with you.

Paying off debts when you die

Oustanding debts are handled by the executor of your estate. They will be responsible for paying out the debts which are left outstanding using assets which the deceased has left behind.

There might not be enough to disposal capital or cash to pay off these debts, so the executor must sell assets (cars and houses) to cover the shortfall.

What Happens to Your Debt When You Die

But then, what if there is still not enough money after selling everything to pay back existing loans? Well, the debts are just usually forgiven. That is – debt collectors won’t go chasing your partner, kids, brothers or sisters or those very close to you.

Australian debt collectors know that this is a time of grievance and it’s a sensitive time, so they will generally leave everyone alone once they’ve got what they can possibly get.

Exceptions to the rule

Now, not in all cases to debt collectors just stop calling. Your loved ones might be responsible for paying debts if you die when:

  • Debts are secured by assets (a car or house) that is owned by someone you love
  • The debt is held in joint names with someone who is still alive
  • An individual (your loved one) has guaranteed the debt

So in these instances, the lender might force your family members to pay your debts after you have died. Then again, we’re more relaxed in Australia and they will make exceptions, especially when the money owed might be a small amount which isn’t worth chasing after.

Joint debt: Credit cards

Probably the biggest issue where your debt still has to be repaid when you die is joint credit cards. If you have a credit card account in joint names and one of you dies, then the other person will need to pay off the debt like normal. This is sometimes still the case even if the deceased did all the spending.

Where you might get some leniency is where the Estate Executor comes along and uses assets of the deceased the clear the balance. When this happens, we would recommend closing the credit card and resorting to a debt-free lifestyle.

Joint debt: Owning a house together

You might own a house together and one of you dies. Your mortgage is still there and it needs to be paid by someone. It doesn’t have to be you but someone who might want to inherit the house down the track.

This is a secured debt that often gets sold off if there is no Will in place for the deceased. It’s important if you don’t want the family home to be sold that you go and get your Will created today. Through using one, you can dictate how debts are to be settled when you die.

In summary

It’s good to know what debts will still be lingering around once you die, especially as you’ll know how to manage them. This way you can ensure you aren’t leaving your loved ones with your big financial obligations.

Such obligations might cause difficulties during a sensitive time of coming to terms with such a loss.

We hope this has cleared things up. You’re welcome to drop a question in the comments box below.