What happens to my debt when I die? - Diana Clement

Personal finance expert Diana Clement explains how debt doesn’t simply disappear when you die — and why planning ahead can save your loved ones from legal and financial stress. Photo / 123rf

THE FACTS

• Debts are typically repaid from your estate after death, with secured loans prioritised.
• Unpaid debts are wiped if no assets exist, unless co-signed or guaranteed by someone else.
• Joint debts and guarantor agreements can leave others liable, so it’s crucial to manage these.

It’s a good question, and the answer is of course “it depends”. But there are some nasty fishhooks that can leave partners and even parents liable.

The starting point is that most debts must be repaid from your estate when you die, and if there is money left after estate administration and funeral costs, and debt repayment, it goes to your heirs. Where a loan is secured against a home or car, the asset is usually sold to repay the debt.

If the property is jointly owned, the surviving owner takes full ownership, but also remains liable for any mortgage or other debt.

Next up is personal tax debt, which is unsecured, but has priority over ordinary loans. Business tax doesn’t pass on to family members, unless they are co-owners in a joint business.

Loved ones can sometimes be left liable for your debt so it's crucial they understand what responsibilities they could inherit. Photo / 123rf

After tax, personal loans, credit cards, utility debts, and buy now pay later (BNPL) are paid back from your assets if you have any. Tenancy debts also fall into this category, although landlords can usually recover at least the bond.

If you leave no money to pay your debts, they get wiped — unless someone else co-signed or guaranteed your loan. In the case where you leave some money but not enough to cover all your debts, then administration costs and funeral expenses come out before the debt.

If the estate can’t cover all the debts, it’s treated as insolvent under the Insolvency Act, and creditors get paid in order of priority, said Angela Jackson, head of service delivery North Island for the Public Trust.

Typically in that situation, the executor or administrator will write to known (or advertise for unknown) creditors, and follow the priority set out in the Act to distribute the funds to those creditors, said Maree Adams, partner at McVeagh Fleming lawyers.

With anything legal, there are always rules that catch people unawares. Joint debt is one of those, or if there is a guarantor. Your death doesn’t release the other party — in fact, it simply delivers your debt to them. If more than one other person is co-signed or has gone guarantor, the bank or other lender can choose to go after that person only.

Joint debt and guarantors remain liable, with creditors prioritising payment under the Insolvency Act if the estate is insolvent. Photo / 123rf

Guarantors can get caught out by open-ended agreements, which make them liable for all future debts with that bank, not just the original loan. Anyone who has gone guarantor for a loan that has now been paid off ought to write to the lender and ask to be released, said Adams. “They’ll [release you] 99% of the time, but they’re not obligated to.” If you wait until the person whose loans you guaranteed dies, you’ve left it too late.

Beware that joint personal or business accounts with your ex may mean you’re legally liable for their new debt after you’ve split. Close those accounts and move banks as soon as you can. Adams adds that a separation agreement helps break the chain.

Student loans are written off on death, and family members don’t inherit the debt. Whew. But you do need to tell the Inland Revenue Department that the person has died.

A word of warning for grieving families: Sometimes debt collectors will try to collect money from people who aren’t legally responsible, said Mario Thorne, associate at McVeagh Fleming. “Debt collectors are just there to be absolute pit bulls,” Thorne said. “They don’t have a lot of regard for due process [and] who’s actually liable for the debts. Know your rights and get advice.”

Who handles paying back the debts after your death depends on who you have named in your will as executor. If you die intestate (without a will), the court appoints an administrator — this could be the Public Trust, another trustee, or a family member.

In some cases, creditors can also apply to administer or wind up the estate, Jackson said.

A little preparation now can save your loved ones a lot of stress later. Photo / 123rf

To make things easier for your loved ones, keep your will updated, close any old joint accounts, and store important documents where they can be found easily.

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