What happens to your debts when you die?

When a person dies in New South Wales, their debts do not automatically disappear. Instead, the process of settling debts becomes part of the administration of the deceased person's estate. Here's what typically happens to debts when someone passes away.

Estate Administration: The Executor named in the deceased person's last Will, or an Administrator appointed by the Court after an application for Letters of Administration is responsible for administering the estate. Part of this process involves identifying and settling the deceased person's debts out of the assets of the estate.

Probate or Letters of Administration: Before the Executor or Administrator can begin to settle the deceased person's debts, they must usually apply for a Grant of Probate (if there is a Will) or Letters of Administration (if there is no Will). These legal documents provide the authority required authority for the Executor or Administrator to obtain the release of the assets of the Estate, pay the debts of the Estate and manage the deceased person's estate until all assets can be transferred to those with an entitlement in the Estate.

Debts Notification: The Executor or Administrator should notify creditors of the deceased person's death. Creditors may include mortgage lenders, credit card companies, utility providers, and any other entities to which the deceased owed money.

Debt Settlement: The Executor or Administrator is responsible for settling the deceased person's debts using the assets of the estate. This may involve selling assets, using funds from bank accounts, or liquidating investments to pay off creditors.

Order of Payment: In NSW, certain debts take priority over others. For example, funeral expenses, estate administration expenses, and taxes are typically paid first. Secured debts, such as mortgages or car loans, may have priority over unsecured debts like credit card debt or personal loans.

Insolvent Estates: If the deceased person's estate is insolvent, meaning that the debts exceed the value of the assets, the estate may be declared bankrupt. In such cases, the assets are distributed among creditors according to a specific order of priority set out in Bankruptcy law.

Distribution to Beneficiaries: Once all debts and expenses have been settled, the remaining assets of the estate can be distributed to the adult beneficiaries named in the Will or, if there is no Will, according to the rules of intestacy. The exception is where there are minor beneficiaries, in which case assets will be held in trust until the minor beneficiaries attain the age upon which they are entitled to their inheritance.

It's important to note that family members are generally not personally liable for the deceased person's debts unless they have provided a personal guarantee or co-signed a loan. However, assets owned jointly with the deceased may be used to settle debts. Creditors have a right to make a claim against all the deceased person's estate.

If you have been appointed as an Executor of a Will, or believe you may be entitled to a benefit in an estate with debts where there is no Will, and want to know more about how to deal with paying a deceased’s debts, reach out today to speak with one of our specialised Wills & Estates lawyers.