Can debt be inherited in Australia?


Losing a loved one is never easy, and any added financial or inheritance strain can be highly stressful. A common concern is whether the people left behind will inherit debt from their parents, spouse, or de facto partner. Money worries are the last thing you want in such a stressful time, so this article aims to address your concerns. 

Let's get to the following commonly asked questions:

  • Can you inherit someone's debt?
  • What kind of debt can be inherited?
  • What loans are forgiven at death?
  • Do I have to pay my husband's credit card debt when he dies?
  • Do you inherit your spouse's debt when you get married?

Q1. Can you inherit someone's debt? 

Unfortunately, this question is slightly more complex than 'yes' or 'no'. The answer depends on the type of debts incurred. When someone dies, they typically leave many debts behind. From medical bills to student loan debt, you might find yourself looking at a large sum of money owed.

Generally speaking, the deceased estate will repay outstanding debts. Any of the deceased's assets or money left will cover most types of debt. What is an estate? It includes all their assets, money, and superannuation death benefits. 

With secured debt, the creditor will reclaim the collateral. With unsecured debt, the estate executor may have to sell the property or other assets to repay the creditor. 

Note: Just because you're someone's next of kin doesn't automatically indicate it's your filial responsibility to their loans or mortgage debt. So, don't worry too much about inheriting your parent's bad credit. 

Q2. What kind of debt can be inherited?

There are a few instances when surviving family or friends might be obliged to pay your debt when you die. While the person's estate will cover what it can, if it becomes insolvent, you may find that you must repay the outstanding debt. 

That said, you are only responsible for certain types of debts when they die. For example, you may get held liable if you sign a Guarantor personal loan or mortgage or have a joint account. 

Guarantor loans

A guarantor loan is a certain type of credit product offered to those who cannot seek loan approval on their own merits. Guarantor loans are one of the few ways of inheriting debt. 

Generally speaking, younger mortgage applicants with a bad or no credit score and a small deposit need a guarantor to help the home buying process. However, you can sign as a guarantor on almost any loan or credit product. You are responsible for the debt if the home buyer cannot meet their mortgage repayment obligations.

What happens to your debts if you die while you have a guarantor on your mortgage? The lender may seek repayment from the guarantor. If the guarantor puts their home equity up as a deposit (which many do), they may lose part of their property.

Joint accounts

Another instance in which the debt collector may come knocking is if you are a joint account holder with the deceased. For example, if you have joint names on a mortgage, you are both responsible for paying the loan. 

So what happens if you die? Your estate will cover as much of your share of the debt as possible. If it cannot fully repay your part of the loan, then your partner may have to cover the remaining outstanding balance. 

Note: It's a good idea to see estate planning attorneys so you can understand what happens to your home loan and property should you or your partner die. There are also life insurance products to assist.

Q3. What loans are forgiven at death?

While all creditors will make claims against the estate, the executor must prioritise debt payments. For instance, if your parents' estate cannot pay off the debts owed, the estate is insolvent.

An insolvent estate will pay off your parents' debts in order of priority. Tax debts (such as income or capital gains tax) are the highest priority. After that, any remaining money will pay off other loan debt. The creditor may have to offer debt forgiveness if the estate cannot cover all debts.

Important: You should seek legal aid from a professional law firm if creditors ask you for debt repayments that the deceased's estate cannot cover.

Q4. Do I have to pay my husband's credit card debt when he dies?

Unless you hold a joint credit card, you do not need to repay your partner's bad debt if they die. If you have a checking account card under your name for their Australian credit card, you are still not legally responsible for paying off the debts.

Note: Remember, you must only repay your spouse's debt if you are a joint account holder for the credit card debt. Otherwise, their estate is responsible.

Q5. Do you inherit your spouse's debt when you get married? 

Are you concerned you'll take on their debt settlement by marrying your partner should they die? Fortunately, even if you're married to someone, you don't have to repay the deceased's debt. 

However, you will likely open joint credit accounts or take out a mortgage or loan together. In these instances, the surviving spouse may be liable to pay part of or all of the debt. 

Note: If you think this applies to you, seek professional advice on whether you are responsible for paying before handing the money over.

Repaying debt

Whether you have inherited your spouse's debt or want to learn debt management, you may want to ask a professional advisor about your personal finance.

Paying debts may seem challenging, but it's not impossible. Here are some ways to get rid of debt fast, improve your credit scoring and save money:

Summing up

Worrying about a loved person's debt after they die is unnecessary stress. Before taking out a joint account, signing as a guarantor, or involving yourself with anyone's debt, ensure you understand your obligations. 

If paying off the mortgage without your partner is too much, consider seeking debt advice or refinancing your home loan. Remember, there are always people to help.

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Disclaimer: The author is not a financial advisor, and the information provided is general and was prepared for information purposes only. This information does not consider your investment objectives, particular needs, or financial situation. This article should not be considered to constitute financial advice. Accordingly, reliance should not be placed on this article as the basis for investing, financial or other decisions.

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