- Date : 10/04/2021
- Read: 4 mins
Loans and credit cards have helped several people cover expenses and achieve their goals in their lifetime. But what happens to their debt after they die?
Loans, mortgages, credit cards , etc. are some common ways to fulfil your dreams and purchase the things you want. Whether it is a personal loan to buy a phone or a home loan to purchase a house, there are many forms of debt you can take. However, not many people know how banks and other lending institutions deal with debt after the borrower’s death. It is important to know who attains the responsibility of clearing debt after the borrower’s death as it could impact the legal heirs.
Here are some things to know in this regard:
What happens to your estate after death?
It is important to know that in the event of your death, your assets will be passed on to your legal heirs, as mentioned in your will. This could be a spouse, child, grandchild, etc. While assets will be distributed to your heirs as per your wishes, your liabilities (such as pending payments, loans, etc.) will be given to the executor. The executor named in your will is responsible for paying back all your debt, along with any interest payments and fees.
What happens if there is no executor?
In the absence of an executor, the responsibility to clear the debt comes on to your family. Here’s how different types of debts are treated after death:
Secured loan: Secured loans are loans that are protected with collateral. These include home loan, car loan, etc. In case of such loans, the lender can sell the collateral used to secure the loan and obtain the pending dues. Your legal heir(s) can also pay back the loan with the inherited money if they have the means to do so.
Unsecured loan: Unsecured loans, such as personal loans, are loans that do not need collateral. If there are outstanding EMIs on the loan at the time of death, the onus to settle them will be on the person who inherits the estate. With no collateral, the lender has no assets to seize. However, the legal heir is liable to pay back your debt up to the amount inherited from your estate. For instance, if your child is your legal heir and inherits assets worth Rs 10,00,000 and you have an outstanding loan of Rs 20,00,000, they will be legally liable to pay only up to the value of the assets, i.e. Rs 10,00,000. On the other hand, if the child does not inherit anything, they will not be obligated to repay your loan.
Some unsecured loans may require a personal guarantee from another person, such as your spouse. In this case, it is the spouse’s responsibility to repay the loan. If the spouse does not settle the loan, the lender can sell their assets to obtain the loan dues.
Joint loan: A joint loan is a loan that you apply for along with another person. The most common example of a joint loan is the home loan that couples often take together. If you take a joint loan, the responsibility of paying back the loan is divided equally between you and the co-borrower. In this case, the co-borrower will be responsible for paying back the dues in your absence.
Student loan: Student loans also require a co-signer. Generally, it is the parents who co-sign a student loan with their child. The legal obligation to repay the loan is passed on to the co-signer. Some banks may also mandate a life insurance policy for the borrower at the time of application that can be used to pay back the loan in the event of death.
Credit card: Credit card dues are not passed on to the legal heirs. However, if the credit card account is a joint account, the co-owner will be responsible for clearing the dues.
Insured debt: If you secure your debt with an insurance plan, the responsibility to pay back the funds falls on the insurance company. However, you must pay all your premiums on time to keep your policy active. If your policy is not active at the time of death, the insurer can refuse to clear the dues and the burden to pay the outstanding amount will ultimately come on to your legal heirs. Thus, you can insure loans as well as credit cards with an insurance plan.
How to make things easier for your loved ones?
You can take a life insurance policy against the loan. In the unfortunate event of your demise, the insurance money can help your heirs pay back your debt. You can also consider distributing your estate equally among your heirs, while specifically mentioning that they are obliged to settle your debt.
If you leave behind adequate assets and mention how they can be used to repay your debts, there will be no chance of disagreement or confusion among your legal heirs later. Check how to deal with debt liability after the death of your partner?