What Happens to Debt After Death?

Nobody wants to think about what happens after you or a loved one passes away. This is a hard topic, but one that’s worth thinking about before you find yourself in this situation. When it comes to finances, one of the biggest questions to ask is what happens to debt after death?

When you die, your estate is generally used to pay for any remaining debts you may have. This becomes more tricky if debts are held jointly with multiple people or if there isn’t enough money in the estate to cover the full cost of the debt. Because this is a topic worth exploring in detail, let’s talk about what happens to debt after death. 

Understanding Different Types of Debts

There are two different types of debts, and each will be treated differently in the case of death. Understanding how these two types of debts are treated will help you know your options in the case of the death of a loved one. 

  • Secured debt – A secured debt is any type of debt that’s tied to an asset, like a home or car. If you default on your mortgage, your lender can reclaim your home to recoup this cost. In the case of death, this debt can be reclaimed by seizing the asset. 
  • Unsecured debt – On the other hand, an unsecured debt doesn’t have any assets tied to it. This includes things like personal loans and credit card debt. In order to access your estate after death, your creditor will need to go through the courts. 

Secured debt is a relatively straightforward process. The asset will be secured, likely resold, and this money will help pay for any remaining debt. With an unsecured debt, however, things are a bit trickier. 

What Happens to Different Types of Debt After Death?

Let’s look at some specific situations regarding unpaid debts after passing away. In most cases, the executor of your will is the person in charge of paying off these debts. Here’s what you can expect with the following types of debts:

  • Mortgage debt – Any unpaid mortgage debt will need to be reclaimed. The inheritors might elect to keep the property if there is already a large amount within the estate, and they might even assume the mortgage. The mortgage might also be paid out of the proceeds of an insurance policy. 
  • Credit card debt – Credit card debt will need to be paid, in some capacity, from the estate. The bank might use the person’s savings or other assets to pay the remaining debt.
  • Personal loans – The same is true for personal loans as credit cards since these are both unsecured debts. 

Who Is Responsible for Paying The Debt After Death?

Who exactly will need to pay in the case of death? Most importantly, do any heirs or relatives need to pay these debts after the passing of a loved one? 

In short, the answer is no. If there aren’t enough assets in the deceased person’s estate to pay any unsecured debt in full, any remaining balance will likely just be written off as a loss to the lender. 

If the person had a life insurance policy or credit card insurance, this could cover any difference. However, it is never legal for creditors or collection agencies to harass heirs into paying debts. If the debt is not yours, you are not responsible for paying it. 

What Happens to Joint Accounts After Death?

One of the tricky areas of debt after death is for joint accounts. If you co-signed a credit card or a loan with your loved one who passed, you will be liable to pay it yourself. That being said, authorised users on credit cards or accounts are not responsible for the card holder’s outstanding debts. 

Because being associated with an unpaid account can be bad for your credit rating, it’s recommended that you remove yourself from these accounts if the primary cardholder is no longer alive. 

What Do You Need To Take Care Of If Your Loved One Dies?

While nobody wants to think about the passing of a loved one, knowing exactly what to do will help you be prepared for anything. The last thing you want to worry about after someone’s passing is dealing with their estate, so keep these steps in mind for the future. 

  • Notify the lender – First, you need to make contact with the deceased person’s bank as soon as possible. It can be even more challenging for loved ones to deal with late statements or debt collectors after the fact, so handle this sooner rather than later. Most lenders have dedicated bereavement services for taking care of this.
  • Provide documentation – Next, you’ll likely need to provide documents like the death certificate and your loved one’s will (if they had one). 
  • Wait for an assessment – From here, you’ll wait for the bank’s assessment. They’ll review their state to see what steps they can take to reclaim any remaining debt. 
  • Action – Finally, the lender will take action to reclaim their debt, usually by using the savings account to pay into any remaining debts. Any remaining savings or assets will be released to the estate once the debt has been fully paid. 

Are You Prepared For Anything?

Hopefully, this guide made the process of dealing with debt after death a little less intimidating. When it comes to the future, it’s best to know your options. Death usually comes with difficult financial decisions, and you should avoid placing these on your family’s shoulders. 
For help managing a loved one’s estate or preparing your own finances, talk to an expert at Debt Busters on 1300 368 322. Our friendly professionals can help you create a debt payoff plan to tackle debt today as well as plan for the future.

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