Exposed: The Truth About Inheriting A Family Members Debt

The aftermath of a loved one's passing often brings not just grief but also questions about financial responsibilities. It's important to understand what happens to debts when someone passes away and when you might be liable. This comprehensive guide will help you navigate the complexities of debt inheritance.

How Are Debts Paid When Someone Passes Away?

When a person dies, their estate becomes responsible for settling outstanding debts. This process is overseen by an executor (appointed by the deceased) or an administrator (appointed by the courts if there is no valid Will). The executor or administrator prioritizes repayment starting with taxes and then moving on to other debts.

Order of Debt Repayment:

Tax Debts: These are typically at the top of the list.
Secured Debts: Mortgages and car loans.
Unsecured Debts: Credit cards, personal loans, etc.

If the estate lacks sufficient funds, assets may be liquidated to cover the shortfall. If all available assets are exhausted and there is still money owing, insolvency rules might kick in, and these debts will be written off.

Can Debts Be Inherited?

Generally speaking, you won’t be called on to foot the bill for any money owed by a relative or loved one, but there are a few exceptions. Here are three scenarios where you might be liable for a deceased person's debts:

Guaranteed Debts: If you've acted as a guarantor for someone else's loan, you've essentially agreed to repay the debt if they default. This commonly occurs in scenarios like parents helping children secure a mortgage. Should the borrower pass away without settling the debt, you could find yourself responsible, particularly if your home serves as collateral.

Joint Debts: When you co-sign a loan with another person, you're both equally responsible for its repayment. If your co-signer passes away, you could be left holding the bag for the remaining balance unless the estate can cover it entirely. This situation often arises with joint mortgages, where the surviving spouse may need to continue payments or sell the property.

Secured Debts: If you've used your assets to secure someone else's loan, such as offering your home as collateral, you could face consequences if the estate can't meet the debt obligations. In such cases, your asset may be at risk of being sold to cover the outstanding amount.

Examples of Inherited Debt Scenarios

Example 1: Guaranteed Loans If you go guarantor on someone else’s loan, you agree to repay the amount they borrowed (or part of it) in the event they become unable to do so themselves. This arrangement is common between property-owning parents and children who would otherwise struggle to get their home loan application over the line. If the borrower passes away and neither the guarantor nor the deceased’s estate can cover the mortgage repayments, the lender might take possession of the guarantor’s home.

Example 2: Joint Loans If you were a co-signatory on a loan with someone who subsequently passes away, you may be liable to repay the remaining balance yourself unless the estate is able to pay the full amount. For example, if a married couple takes out a mortgage together and one partner dies, the surviving partner will still be on the hook for the remaining debt. If there’s no way for the surviving spouse to afford the repayments, they might be forced to sell the property.

Example 3: Secured Loans Another scenario where you might be obliged to cover part of a deceased person’s debt is if you agreed to secure their loan against one of your assets. If the estate doesn’t have enough funds to pay the amount owed, the asset you offered up as collateral might have to be sold.

Navigating Debt Inheritance

While these instances highlight potential risks, it's important to note that not all debts are automatically inherited. Understanding your obligations before entering financial agreements with family members is paramount.

Key Steps to Take:

Understand Your Obligations: Before co-signing or guaranteeing a loan, ensure you understand the potential liabilities.

Seek Professional Advice: Consult with financial advisers or legal experts to understand the implications fully.

Regular Financial Discussions: Engage in regular discussions about finances with family members to avoid surprises.

Navigating the complexities of debt inheritance requires careful consideration and advice from financial professionals or legal experts. By being informed and proactive, you can better manage and mitigate the financial responsibilities that may arise when a loved one passes away.

This provides general educational information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. Life Sumo (Orion Enterprises (Cairns) Pty Ltd) has representatives that are authorised to provide personal financial advice.