When a loved one passes away and leaves behind debts such as a mortgage, car loan or credit card debt, does it still need to be paid? Who is responsible for paying it? Or is it all simply wiped clean? Managing a loved one's estate can often come about unexpectedly so knowing what happens to debt after you pass can be helpful to understand.
Wills and estate law can become complicated though as everyone's situation is different, so be sure to enlist the help of a professional who is able to advise on your specific matters.
What happens to debt?
What happens to debt after someone passes often depends on how much debt they have, what type of debt it is (secured versus unsecured), and the remaining assets they have to pay it off. In most cases, when a person passes away, their debt doesn't just get dismissed or disappear. Generally, the executor of their estate (a person appointed by the deceased in their Will) handles all outstanding debt before any beneficiaries are paid out. The debt is paid using assets left behind such as cash, or through selling assets (such as property) to pay for the debt.
What is secured versus unsecured debt?
The key difference between secured and unsecured debt is collateral. Secured debt means the debt is tied to collateral such as cars and property. While unsecured debt is not tied to any collateral such as credit card debt, medical bills or other personal loans.
What if there are not enough in assets to pay off the debt?
If, after all assets have been sold, and there are still insufficient funds to pay off all remaining debt, the estate becomes insolvent (meaning the total value of assets is not enough to cover liabilities). If an estate is deemed insolvent the debt is placed in order of importance with secured debt prioritised over unsecured debt due to the collateral tied to the loan. Any debt that cannot be paid due to insolvency is not passed onto the family and is usually forgiven by the lender or creditor.
When is debt passed on?
Debt is only passed on in a few instances where the debt is in joint names with someone else (living), if the debt is secured against an asset owned by someone else (such as a car or property) or if someone has guaranteed the debt (You have promised to pay the debt is the borrower is unable to).
A great public resource is the Public Trustee of Queensland which offers free Will-making services, enduring powers of attorney (a document to appoint someone that can make decisions on your behalf if you're no longer capable of doing so), deceased estate management and unclaimed money.
This information provides general advice only. We do not provide advice about this product based on any consideration of your personal objectives, needs or circumstances.