What happens to debts when you die?
Death is a topic that makes many people uncomfortable, but it is a reality none of us can avoid – not even the royal family.
There’s plenty of advice about preparing wills to pass on your assets to whoever you choose when you die, but when you are more likely to have debts than dollars – what happens?
Will your partner or children have to pay off your debts, or do the debts disappear? Like all things concerning money – it depends.
Debtfix talks about what happens to debts when you die
What type of debt is it?
Your next-of-kin or family are not liable for most of your outstanding debts, but your estate is. Your estate includes all the assets – property, vehicles and money – you had on the day you died. This includes KiwiSaver, your car, and any savings.
For example, if you owe the bank $400 for an overdraft, the bank can make a claim against the estate for repayment of that overdraft and the people inheriting your estate get what is left. If there isn’t $400 cash in your estate to repay the overdraft, your assets will be sold to cover the debt repayment.
If you rented your home and you were the sole name on the tenancy agreement, then the Residential Tenancy Act states that a tenancy ends 21 days after a landlord is given notice of your death. During that time more rent becomes due, and your estate would have to pay it.
Any outstanding balance on a student loan may be written off by Inland Revenue (IR), but if they are not told about your death and IR continues making any payments, it can create a debt obligation.
If your estate does not have enough assets to pay off a credit card, buy now pay later deal, personal loan with the bank, pay day loan, hire purchase agreement, mortgage, power bill, outstanding income tax or any other debt, the debt usually dies with the deceased.
However, this is not always the case.
Whose names are on the debt agreement?
When a debt is jointly in your name, and someone else’s, for example a mortgage in your name and your partner’s, then your partner would become liable for mortgage repayments. The same applies with utility bills such as power, water, phone and internet, when they are jointly in your name and the name of your partner, flatmates or other next-of-kin.
If you have a joint credit card, then the other person is responsible for the repayments when you die. If you have officially authorised your children to use your credit card, the card issuer can ask them to pay off any large debts they have racked up on the credit card, even if it is in your name only.
If someone is a guarantor for any of your debts, they will become liable for your debt repayments when you die. This is extremely important for older family members, that is parents or grandparents who become guarantors for their offspring, and they have assets but limited income to repay a debt. The situation could require them to find a debt solution to cover repayments of your loan that they guaranteed.
Do you have insurance?
The Debtfix Crew are not a big fans of loan repayment insurance, which can pay off a debt when you die, but the providers have a lot of exclusions that means this seldom happens.
However, if you have a mortgage and a family, life insurance is a sensible option to protect your next-of-kin. If you die life insurance can help your family pay off the mortgage and cover other debts and funeral costs.
Can a debt collector chase my family?
No, but sometimes they do.
The law is very clear that debt collectors can’t chase your family or next-of-kin for repayment of debts solely in your name. However, when you die any businesses or organisations you owe money to have six months to make a claim against your estate – not your family.
Once a claim is made against your estate, the assets won’t be released to your next-of-kin until the claim is settled.
What if I don’t leave a will?
It’s easy to think that if you don’t own anything and you do owe a lot, there’s not much point in having a will. However, when you die without a will the people you leave behind have a more difficult job of sorting out your financial affairs when they are grieving, and it takes longer to settle your estate.
If you don’t leave a will, you die intestate.
If you have less than $15000 in assets, including savings, shares, KiwiSaver, and no real estate, your family or next-of-kin can administrate your estate. They will have to collect your assets, pay any debts from those assets and distribute anything that is left over.
If you have more than $15000 in assets or own a property, a formal administrator of the estate must be appointed, for example the Public Trust, and they will manage the estate and financial affairs.
Causing financial hardship for your next-of-kin
Losing a loved one is hard enough, and it can also mean the surviving partner is confronted with unexpected financial hardship. Unscrupulous lenders, unexpectedly losing income and working out what debts do or don’t need to be repaid is hard work.
The best thing you can do now is to write a will and ensure your loved ones know that you have written one.
The Debtfix Crew are here to help families and next-of-kin through such difficult times too. Contact us now for guidance and the correct debt advice.