Support, guidance & advice for todays primary carers
Children are often concerned about what happens with their parents’ debts should they pass away. A common concern is that the family may be personally responsible for the repayment of parents’ debts.
The death of a parent can sometimes mean financial turmoil for surviving relatives. However, fortunately, lingering parents’ debts aren’t the responsibility of the adult children in the family. Debts are paid from the deceased person’s estate, and then the remaining assets are distributed amongst the beneficiaries.
How parents’ debts are dealt with is dependent upon a number of factors:
- Are the debts secured or unsecured?
- Is there a guarantor for the debts?
- Were the debts in the deceased person’s sole name, or were they held jointly with another person (such as a spouse)?
- What types of assets are in the estate (such as bank accounts or real estate)?
DEALING WITH THE ESTATE
If parents die in debt, the first place their executors must turn their attention to is the estate. (Note that executors are appointed in the will of the deceased person).
The role of the executor is to collect and distribute all of the deceased person’s assets. The first step is to pay all the parents’ debts of the estate, and once this is done, the remaining benefits under the will are available for distribution to the beneficiaries.
Depending on your state or territory, the executor may be required to publish a ‘Notice of Intent’ to distribute. This notice allows the opportunity for any creditors to claim any outstanding parents’ debts from the estate. It also enables other family members or previous spouses to make a claim if they believe they may be entitled to an inheritance.
PAYING OFF SECURED AND UNSECURED DEBTS
Secured debt, such as a mortgage, is secured against a particular asset, e.g., the home of the deceased person. These secured debts will be discharged (paid out) by the executor before any unsecured debts are paid.
If the deceased has an outstanding debt that is secured against an asset, the lender can sell that asset to repay the debt. While the beneficiaries of the estate are not responsible for the debt, the estate will lose the asset to discharge the debt.
Credit cards and personal loans are usually considered unsecured parents’ debts, as they are not secured against a particular asset. These unsecured debts will be repaid using other assets of the deceased, e.g., money sitting in the bank accounts.
IF THERE IS A GUARANTOR FOR THE PARENTS’ DEBTS
A guarantor promises to continue repayments when the borrower passes away.
This means that when a friend or family member has guaranteed a debt, the creditor can hold the guarantor responsible for the parents’ debts after the deceased’s death. If the debt is secured, the lender can also sell the asset given as security to repay the debt.
WHERE THE DEBTS WERE HELD JOINTLY WITH ANOTHER PERSON (SUCH AS A SPOUSE)
If a secured or unsecured debt is held by the deceased and another person, then both will be responsible for paying the debt.
It will need to be calculated how much of the debt is payable by the estate of the deceased. The assets in the estate may be used to pay off the deceased’s part of the debt.
The death of a parent can sometimes mean financial turmoil for surviving relatives
If there are no assets in the estate of the deceased or not enough to pay off their share of the debt, the joint account holder will have to repay the full outstanding debt.
THE TYPES OF ASSETS IN THE ESTATE (SUCH AS BANK ACCOUNTS OR REAL ESTATE)
When a person dies, any debts they have been paid out from money in bank accounts or cash made available through the sale of any properties that were owned by the deceased. The remainder of the assets are then distributed amongst the beneficiaries in accordance with the terms contained in the will.
If there is not enough money left in the estate to cover all debts, then debts can be written off. This is a complex process requiring specialist legal advice. Unfortunately, it also means that there won’t be assets available for distribution to the beneficiaries.
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