When someone passes away, they often leave behind various financial obligations. This raises a common question for their loved ones: What happens to their debts?
In Australia, while some debts may be resolved through the person’s estate, most are not simply “forgiven” upon death. Instead, their payment or forgiveness depends on the debt type, available assets, and who is responsible for the debt.
Below, we address common questions about what happens to specific types of debt when someone passes away in Australia.
What Happens to My Debts When I Pass Away in Australia?
When a person passes away in Australia, their debts do not automatically disappear. Instead, these debts are usually paid off using the person’s assets. This process is managed by an executor, a person named in the deceased’s will to oversee their estate.
The executor’s role includes gathering assets, settling debts, and distributing what’s left to the beneficiaries as outlined in the will.
Debts such as credit card balances, mortgages, and personal loans are typically settled through the estate. If there are insufficient assets, some debts may go unpaid.
However, certain types of debt are more complex and may involve other individuals, such as co-signers or guarantors. Here, we explain how different types of debt are handled.
Also Read: Insolvent Estate: 7 Key Points You Should Know
Are Mortgages and Personal Loans Forgiven at Death?
When it comes to mortgages and personal loans, these debts generally do not disappear when a person dies. Here’s what typically happens with each:
Mortgages
If the deceased had a mortgage, this loan is usually not forgiven. Instead, the debt remains attached to the property. The executor must use estate funds to pay off the mortgage. If there aren’t enough funds in the estate, the property may need to be sold to settle the mortgage debt.
However, if a family member or beneficiary inherits the property and wants to keep it, they may choose to take over the mortgage payments or refinance the loan in their name. In some cases, life insurance policies may be used to pay off the mortgage, depending on the deceased’s financial planning.
Personal Loans
Like mortgages, personal loans are usually paid off using the deceased’s estate. If the estate doesn’t have enough funds, the lender may need to write off the remaining balance, though this varies. Personal loans with a guarantor or co-signer may become the responsibility of those parties.
While some exceptions exist, such as life insurance policies or joint ownership agreements, it’s important to remember that both mortgages and personal loans are generally not forgiven and need to be addressed by the estate.
How Does Debt Impact the Estate for Surviving Family Members?
Debt can significantly impact an estate, especially if the deceased has large financial obligations. Before any assets are distributed to heirs, the estate must pay off all outstanding debts. This process is known as estate administration and is an essential responsibility of the executor.
Asset Liquidation
If there aren’t enough liquid assets, such as cash or investments, to cover debts, the executor may need to sell physical assets like property, vehicles, or valuable items. This can delay the distribution of assets to beneficiaries and sometimes leave fewer assets available for them.
Reduced Inheritance
After debts are paid, any remaining funds are then distributed according to the will. However, if the debts are substantial, there may be little or nothing left for the beneficiaries.
It’s essential for families to understand that inheriting assets does not always guarantee a financial windfall, as debts may substantially reduce or deplete the estate.
Impact on Jointly Owned Property
In some cases, jointly owned assets like real estate or bank accounts may pass directly to the surviving joint owner without going through the estate. This is called the “right of survivorship.” However, this can vary depending on the type of ownership and whether there is any specific debt tied to that asset.
Also Read: Do You Inherit Your Parents Debt in Australia?
Who Is Responsible for My Credit Card Debt After I Die?
Credit card debt is generally not forgiven at death and must be paid from the deceased’s estate. Here’s how it’s typically handled:
Credit Card Debt and Estate Funds
The executor is responsible for using estate funds to pay off any credit card debt. This includes gathering funds from bank accounts, selling assets, or using any available cash reserves within the estate.
Credit Card Debt with Joint Account Holders
If the credit card was in the deceased person’s name only, the debt does not transfer to surviving family members.
However, if the card had a co-signer or was a joint account, the surviving co-signer may be held responsible for the debt. Importantly, authorised users who were not co-signers are generally not responsible for repaying the balance.
What If the Estate Can’t Cover the Debt?
If there are insufficient funds to cover the credit card debt, the estate is considered insolvent. In such cases, creditors may write off the remaining debt, but this depends on the terms with the lender. Credit card companies generally cannot claim repayment from family members who were not responsible parties on the account.
Is My Family Liable for Any of My Outstanding Debts?
A common concern for many is whether their family will have to cover any debts left behind. In Australia, debt does not pass directly to family members unless they were co-signers, guarantors, or joint owners of a specific debt. Here’s what to know about different situations:
Personal Guarantees and Co-Signed Loans
If a family member co-signed a loan or acted as a guarantor, they are legally responsible for that debt. This responsibility does not end with the death of the original borrower. Instead, the debt becomes the responsibility of the co-signer or guarantor, who may need to continue making payments or settle the balance.
Joint Loans and Debts
For loans held jointly, such as some mortgages or business loans, the surviving borrower remains liable for the debt. This means they must either continue making payments or work with the lender to modify the loan terms if needed.
Unauthorised Debt Transfer to Family
If a debt is solely in the deceased person’s name and the family members were not co-signers or guarantors, they are generally not liable. Creditors cannot force family members to repay debts they did not take part in.
However, if the deceased left behind significant debts, the estate’s assets may be used to pay off creditors before any inheritance is given to family members.
Understanding these points can help families be better prepared and ensure they are not faced with unexpected financial burdens due to unresolved debt.
Also Read: Can You Sue a Dead Person Australia?
Moving Forward with Debt and Estate Planning
Handling debt after a loved one’s passing can be challenging. It is important to understand that while some assets and debts may transfer automatically, most debts will need to be managed through the estate’s available assets.
By planning carefully and knowing what debts are forgiven at death, families can minimise the potential financial impact of unresolved debts.
A well-prepared estate plan that considers debts, along with life insurance or other financial safety nets, can help ensure that loved ones are left with manageable responsibilities. Consulting a professional, such as a family lawyer, can provide clarity and help ensure that debts are managed effectively.
Ready to Plan? Reach Out to Walker Pender for Guidance
If you’re considering how your debts will impact your loved ones, Walker Pender can provide personalised advice to ensure peace of mind. Contact our experienced family and estate lawyers to learn more about managing debts in your estate and protecting your family’s financial future.
Call us today to start a conversation that helps secure your loved ones’ future.
