When someone dies, their family may be left with questions about outstanding loans, credit cards, mortgages and other financial obligations. One of the most common concerns is whether those debts pass to their spouse, children or other beneficiaries. In most cases, you do not personally inherit someone else’s debt simply because you are their spouse, child or beneficiary. Instead, debts are generally dealt with as part of the deceased person’s estate before the remaining assets are distributed to beneficiaries.
There are some important situations where you may already have responsibility for a debt or where a debt can affect an asset you receive from an estate. This can arise with joint loans, mortgages, personal guarantees and insolvent estates. Understanding the difference can be particularly important for executors, joint borrowers, guarantors and beneficiaries receiving property.
What happens to debt when someone dies in Australia?
When a person dies, their debts do not simply disappear. The executor or administrator generally needs to identify the deceased person’s assets and liabilities and deal with the debts and expenses of the estate before distributing the remaining assets to beneficiaries. This means that debts can reduce the value of the estate and ultimately the amount beneficiaries receive. However, being a beneficiary or relative does not generally make you personally responsible for paying a deceased person’s debts from your own money.
Do you inherit your parents’ debt in Australia?
Generally, no. A child does not usually become personally responsible for a parent’s debt simply because their parent has died. The same general principle applies to a spouse or another beneficiary.
For example, if your parent had credit card debt solely in their name when they died, the debt would generally need to be dealt with as part of administering their estate. You would not usually be required to pay the debt from your own money simply because you are their child. Your position may be different if you already have a legal obligation connected with the debt. This may arise if you are a joint borrower or have provided a personal guarantee.
When could you be responsible for a debt after someone dies?
Whether you have responsibility for a debt will depend on the circumstances and the terms of the relevant loan, account, guarantee or security. Some of the most important situations to consider include joint debts, secured debts and personal guarantees.
Joint debts
If you held a loan jointly with the deceased person, their death does not necessarily end your own obligations under the loan. For example, if you and the deceased person jointly borrowed money, you may remain responsible for repayments after their death.
This is different from inheriting someone else’s debt simply because you are related to them. Your potential liability arises from your own involvement in the borrowing arrangement. The terms of the particular loan or account should be reviewed to determine your obligations.
Mortgages and other secured debts
A secured debt is connected with an asset over which the lender has security. A home loan secured by a mortgage over a property is a common example. A mortgage does not automatically disappear when the borrower dies. If a beneficiary is to receive a property with a mortgage and wants to keep the property, the secured debt will need to be dealt with before the property can be transferred.
This may involve paying out or refinancing the mortgage. If the beneficiary cannot refinance the mortgage, the property may need to be sold. The mortgage and relevant expenses can then be paid from the proceeds before the balance is dealt with as part of the estate. The position will depend on factors including how the property was owned, the terms of the Will, the mortgage arrangements and the circumstances of the estate.
Personal guarantees
A personal guarantee is another situation that needs to be considered carefully. If you guaranteed a loan or other financial obligation for someone who has died, you should not assume that the person’s death brings your obligations under the guarantee to an end.
Your position will depend on the terms of the guarantee and the relevant circumstances. If a creditor seeks payment from you under a guarantee following someone’s death, it is important to obtain advice about your specific obligations before determining how to respond.
What happens if an estate cannot pay all its debts?
An estate that does not have sufficient assets to pay its liabilities in full may be an insolvent estate. Insolvent deceased estates are subject to specific rules governing how assets and liabilities are administered and how creditors are dealt with. This means an executor should not simply choose which creditors to pay or distribute the remaining assets to beneficiaries without first understanding the estate’s financial position. Importantly, beneficiaries do not generally become personally responsible for an estate’s shortfall simply because they are named in the Will or entitled to an inheritance.
If there is concern that an estate may be insolvent, the executor or administrator should consider obtaining legal advice before paying creditors or distributing estate assets.
What do executors need to know about debts?
An executor is responsible for administering the deceased estate. This can include identifying and protecting estate assets, identifying liabilities, dealing with debts and expenses and distributing the remaining estate to beneficiaries. Debts need to be properly considered before the estate is distributed. This is particularly important because distributing assets too early can expose an executor to risk if debts or other liabilities remain outstanding.
Depending on the circumstances, an executor who distributes estate assets without properly accounting for the estate’s debts and expenses may become personally liable for a resulting shortfall. Executors dealing with significant debts, uncertain liabilities or an estate that may be insolvent should consider obtaining advice before making distributions.
What should you do if you are contacted about a deceased person’s debt?
Receiving a letter or phone call about a loved one’s debt does not automatically mean you are personally responsible for paying it. The first step is to understand why the creditor is contacting you and in what capacity. If you are the executor or administrator, you may be dealing with the creditor on behalf of the estate rather than being personally responsible for the debt. Alternatively, you may have your own obligations because of a joint loan, personal guarantee or another contractual arrangement.
Before paying a deceased person’s debt from your own money or accepting personal responsibility for it, it is important to understand the legal basis on which payment is being sought.
Speak With Our Probate and Estate Administration Team
Dealing with debts can make administering an estate more complicated, particularly where there is a mortgage, joint borrowing arrangement, personal guarantee or concern that the estate may not have enough assets to meet its liabilities.
Our Probate and Estate Administration team can assist executors and families to understand the estate administration process, deal with estate liabilities and understand their obligations. If you are administering an estate or are unsure how a deceased person’s debts affect you, speak with our team about your circumstances. Call Southern Waters Legal on (02) 9523 5535 or get in touch with us online.
This article provides general information only and does not constitute legal advice. The law and its application can change, and the appropriate approach will depend on your individual circumstances. You should obtain legal advice specific to your situation.
