Dealing with the debts of a deceased person

When a person dies their debts do not pass away with them. How these debts are to be managed, however, depends on matters such as the type of debts, their size and the net total of the assets and liabilities contained within the estate. The term estate refers to the assets belonging to the deceased and will include real estate, bank accounts, shares, motor vehicles and other property such as furniture, jewellery and art work. Debts might include personal loans, credit cards or mortgages, utility bills and funeral expenses.

The first issue to be dealt with regard to a deceased person’s estate is whether Probate (where there is a Will) or Letters of Administration (where there is no Will) is required to deal with the estate. When an estate is very small and uncomplicated, or all assets are held as joint tenancies, there may be no need to obtain Probate or Letters of Administration.

The estate’s debts have priority and have to be paid before the estate can be distributed to the nominated beneficiaries. This process is managed on behalf of the estate by the Executor named in the Will or the appointed Administrator. It is their responsibility to check the assets available which can be used to repay any outstanding debts. This may require the need to sell assets. If there is insufficient funds the debt may not need to be repaid though this can depend on whether the debt is secured or unsecured.

As part of this process it is important for Capital Gains Tax purposes to ascertain the date the deceased acquired any assets liable to the tax and how much they originally cost. Funeral expenses and Executor’s expenses would normally be paid out at this point. In practice, this will probably involve setting up a bank account in the name of the estate so as to ease administration and the accounting of property or share sales and collecting interest.

Contact needs to be made with the deceased’s bank to inform them of the death and arrange the funeral expenses to be paid. Those organisations identified as having with outstanding bills need to be contacted and advised that their debt now forms part of the deceased’s estate.

When collecting assets different organisations are likely to have different processes for releasing assets to an Executor. This may require a certified copy of the grant of probate and personal identification being provided to them.

Secured and Unsecured debts 

An unsecured debt is one where there is no collateral provided to a creditor to secure it. Examples include personal loans, credit card debts and fuel bills.

A secured debt, on the other hand, is a debt for which collateral has been given, and the debt is supported by an asset which may well have to be sold in order to pay off the debt. The most frequently seen example would be a mortgage on a property.

Can a deceased person's debt be inherited?

Debt cannot normally be inherited by members of the deceased’s family. There are, however, some exceptions in particular circumstances. Examples include where a family member has personally guaranteed a debt, they are a joint borrower or has an asset which has been used as security for a loan. In these cases the debt can be ‘inherited’ and need to be dealt with appropriately.

Clearly, it is important for individuals to consider the potential ramifications of being a guarantor or joint borrower.

What happens when an estate is insolvent?

If the estate has insufficient funds to repay the outstanding debts it will be considered insolvent.  If a debt is in a couple’s name it will be necessary to calculate how much of the debt is to be paid by the surviving partner.

If it is the case that the estate’s debts and liabilities exceed the value of all its assets and it is effectively insolvent, the Executor should refrain from paying the estate’s debts.  Creditors will need to be advised that the estate is suspected of being insolvent. They will need to be informed that they may not be paid and in full and that an application for bankruptcy is going to be made on behalf of the estate.  In some circumstances, negotiation may be possible to waive or reduce a specific liability.

Executors need to be very careful when attending to payment of debts of the estate to ensure that there are sufficient assets to pay all existing and future liabilities of the estate.

What does it mean?

The Executor or Administrator is obliged to pay all debts of the deceased (starting with any tax due) before any of the beneficiaries can receive any benefits. They also need to have a clear understanding of what liabilities are attached to a particular asset such as a mortgage on a property and how the deceased’s Will proposed it should be dealt with.

An Executor needs to make sure of an estate’s inventory and obligations before attending to the payment of debts on behalf of the estate. It is vital that this review of the estate’s assets and liabilities is sufficiently thorough to determine whether the estate is solvent or not.

Executors who are too quick to pay off some or all of the debts may do so not realising that the estate is not solvent. This puts the Executor at risk of taking on personal liability where perhaps the debts have not been paid in the correct order of priority.

Given the potential time-consuming complexities and pitfalls that can put an Executor at risk of personal liability, where an Executor is uncertain or unfamiliar with the processes involved, they should obtain expert legal advice as soon as possible.

Contact our Probate Lawyers based in Sydney, NSW

Szabo & Associates Solicitors have many years experience advising on Wills, Probate, estate administration, estate planning and all related matters. If you need our assistance please contact us on 02 9281 5088 or complete the online contact form.