What Happens to Your Debt When You Pass Away?

There are many misconceptions about debt and inheritance. Many South Africans believe that their debts disappear at their death, but this is not so.

There are two possible scenarios that take place when you pass away that will inform how your debt is managed and whether your family could be saddled with financial woes.

Scenario 1: You do not leave a last will and testament

If you pass on and have not drawn up a will outlining to whom you wish to leave your worldly goods, your estate will be governed by the law of intestate succession. This usually means that your estate will be divided amongst your surviving spouse, children, parents, or siblings according to a set formula specified in the Intestate Succession Act 81 of 1987. The danger of not having a will is that the distribution may not reflect your wishes about who you would have wished to inherit. If your estate is declared insolvent which means your estate has insufficient assets to pay off your debts, the laws of insolvency will then apply to the estate. This means that the estate has to be declared insolvent, creditors need to be informed and legal steps can be taken by creditors within a certain time period.

Scenario 2: If you have a last will and testament

If you leave behind a will you will have nominated an executor of your estate. An executor manages the cash and other assets, sorts out any debts which may leave behind which included paying any outstanding taxes and other taxes that fall due at your death. The executor then distributes the remainder of the assets – if there are any – to the heirs listed in your will.

The value of your estate is calculated by subtracting all the liabilities or debts from all your assets. Your loved ones may be responsible for repaying your debts if after selling off your assets there is still not enough money left to settle all outstanding debt. The remaining debt will then be inherited by the beneficiaries you have listed in your will. In some instances, your heirs may have to pay the debt in cash and in others, the bank with which you had an outstanding home loan at your passing, may be willing to grant a new loan to your heirs. This is provided the heirs can afford to repay the loan.

Exceptions: Surety and marriage contracts

Sureties

If you take out loans and other forms of debt, such as car and home loans and another person has signed surety for that debt, at your debt, the loan provider will come calling on the surety to pay any outstanding amount. If the person that signed surety does not have sufficient cash to pay your outstanding debt, the loan provider may repossess and liquidate assets of that person to recover the money.

Marriage contracts

• If you are married in community of property, it means that everything owned belongs equally to you and your spouse and this includes any debts incurred by either of you.

At your death, all the accumulated debt will pass to your surviving spouse.

• If you are married out of community of property, the marital assets of each spouse are separate from the other and similarly, your estate is separate from that of your spouse when you die. This means your spouse is not liable for your debts. It is important to consult with a lawyer and plan your estate to ensure you completely understand all possible outcomes in terms of the laws and how they impact your estate.

Types of Debt: Secured or unsecured

Secured debts are debts that are secured against certain types of assets such as your home or car. When a bank lends you money and you stop making repayments, the bank or borrower can sell your car to recover the amount owed. Furthermore, if the sale proceeds of your car is insufficient to settle the outstanding car loan, the bank will call on any person that may have provided the surety or collateral to pay your outstanding car loan. At your death, the executor of your estate will be obliged to settle the outstanding loans with your bank.

 If a debt is unsecured, there is no asset backing the loan. Personal loans and credit card debt are examples of unsecured debt. If you default on an unsecured debt, the bank or loan provider will need to take legal action to collect the monies owed. Unsecured debt, similar to secured debt will need to be repaid to the loan provider from your estate.

Tackle your debts now

It is essential that you make provision for any debt that is left behind in your estate when you pass away. Estate planning is important and one way to deal with debt that you leave behind when you pass away is to take out life assurance. Failing to plan for your inevitable passing can leave your loved ones in a tough financial situation with lasting impacts.

If you cannot afford to pay an attorney to draw up a will you make use of the free will drafting service which is held once a year by participating attorneys. For more information visit the website of the South African Law Society.

Some debt, such as a car or home loan, or a small credit card balance that you can repay each month, is acceptable. However, if you are struggling to pay your loans each month, or you need to take out short-term loans to meet the repayments on other loans, don’t let the situation escalate out of control.

Speak to one of our specialist debt advisers today.

Don’t leave it too late and leave your family burdened with your debts.