What happens to your debt when you die?


Death is an inevitable part of life; unfortunately, for some of us, debt is also something we can't avoid. Whether it's a credit card, a car or home loan, business finances or university fees, most of us have debt at some point in our life. But what happens to your debts if you die before you can pay them off? And will the debt collector come knocking if your spouse dies? 

The ins and outs of consumer financial debt and what happens to debt after you die may seem complicated. And in a time of grief and sadness, thinking about whether you are responsible for the debt your partner left may affect your mental and physical health. 

We'll do our best to explain your debt responsibilities and answer any frequently asked questions.

Let's get to the following commonly asked questions:

  • What is the difference between secured and unsecured debt?
  • Is the next of kin legally responsible for debt?
  • Am I responsible for my spouse's debt after death?
  • What happens to your debt if you have no assets when you die?
  • What happens to credit card debt when you die in Australia?
  • How do I repay my debt?

Q1. What are the differences between secured and unsecured debt?

Firstly, let's unpack different types of debt. You might have heard the terms secured and unsecured debt before—but what do they mean?

A secured debt uses an asset as collateral against your loan debt repayments. For instance, when home buying, your home loan uses the property as security. Similarly, a car loan uses the vehicle as security.

On the other hand, unsecured debt does not use any asset as security. A line of credit, personal loan, or student loans are examples of unsecured debt. 

Q2. Is the next of kin legally responsible for debt? 

Generally speaking, the deceased's next of kin would expect the money left and assets in the estate to cover the remaining debts. However, the legal responsibilities differ depending on the type of debt. 

Secured debt 

As we explained, secured debt means the loan lender has a legal right to repossess an asset secured against a loan. For example, if your deceased spouse has an unpaid home equity loan, the lender may repossess the real estate. However, your property portfolio, savings account, and other investments will remain untouched. 

What about unsecured debts? For example, the lender cannot reclaim an asset if repayments are towards an unsecured student loan debt. As such, the lender must go to court to take the deceased borrower's assets. However, the lender can only reclaim the deceased's estate. If you're concerned, seek legal aid. 

Important: Before your partner dies or you pass away, it's best to create an estate plan to deal with the person's debt.

Guaranteed debts 

Are you a guarantor for a deceased person's estate? If so, you agreed to continue paying debts after the borrower stops making them. The lender may chase you to repay the debt after death. If it is secured debt (and you, as the guarantor, supplied the security), the lender has the right to sell the asset. 

Debts you're unable to repay

What happens when the estate cannot cover a deceased person's debts? If the unpaid debts are unsecured, in the deceased's name only, and without a guarantor, they may get wiped away. The executor will speak to credit card companies and lenders to inform them that the estate's net worth cannot pay off any debt owed. 

Important: It's the estate executors' responsibility to handle unpaid debt. Other family members do not have to do anything. 

Q3. Am I responsible for my spouse's debt after death? 

Taking responsibility for someone else's debt is stressful. It might damage your personal finance, and with bad credit, you might struggle. For example, depending on the causes of death, they may have medical debt. Likely, the lender agreed that the deceased estate's assets would pay for medical debt. 

Are you responsible for paying your partner's debt? We've briefly covered different debts, and so far, you only need to repay your spouse's debt if you are a guarantor. However, there is one instance where this can change.

Joint debts

If you own a joint account, you may have to repay outstanding debt on your spouse's behalf when they pass away. Whether you are both an account holder in a bank account, credit card, or mortgage debt, you are equally responsible for the remaining balance. 

How do joint accounts work? Everyone's name on the account is responsible for the debt. If one account holder dies, their estate might repay their share. Alternatively, the remaining account holder might have to repay the whole debt.

If the deceased's estate cannot repay their part of the debt, you may have to cover it. Seek legal advice if you're unsure whether you're responsible for your spouse's debt. 

Note: If this damages your credit score, speak to a financial advisor about urgent credit repair. 

Q4. What happens to your debt when you die if you have no assets?

What happens if you pass away without enough money to repay all your consumer debt? Unfortunately, it's not always as simple as expecting the estate to pay all remaining debts. 

It's called an insolvent estate. The executor arranges your debts in order of priority. For instance, they ensure you pay tax first while credit card debt is a lower priority. Then, it's the executor's responsibility to check whether there are any available assets to repay the debt. 

Note: Life insurance companies offer policies to help look after your family and repay debts after you die. 

Q5. What happens to credit card debt when you die in Australia?

Credit card accounts are a low priority. Once your estate has repaid more pressing debts, it will cover any outstanding credit cards. If you have business credit cards, your company will handle the debt.

Q6. How do I repay my debt?

If you're worried about debt, finding fast debt solutions is crucial. Fortunately, there are plenty of ways to get on top of your monthly payments. 

  • Speak to your mortgage lenders and credit unions: Refinance rates may save you a lot.
  • Debt consolidation: Consider taking out a consolidation loan to cover your debts. Use loan calculators to get the best rates. 
  • Adjust payment plans: Switching to fortnightly repayments might help you save money.

It may seem overwhelming. However, to avoid entering into a stressful debt negotiation with your creditors, consider everything from student loan refinancing to debt consolidation. 

Summing up

If you're concerned about whether your loved ones will have to handle your debt when you die, don't worry. 

Unless you have joint accounts or a guarantor, your family won't have to repay your debts. Consider credit counselling or entering into a debt agreement if you have a lot of debt and worry your estate won't cover it.

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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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