Can debt be inherited? Yes, here’s what you should know

When you lose someone you love, financial stress should be the last thing on your mind.

If you’re worried about whether you could inherit debt from your parents or partner, explore the answers to these questions.

Can you inherit someone else’s debt?

If there are outstanding debts in someone’s life when they die, their estate (any assets or money they owned at the time of their death) will be used to pay those debts. If the debt is secured, the creditor will reclaim the collateral. If the debt is unsecured, the executor of the estate may need to sell assets, such as property or other investments, to repay the creditor.

Guarantor loans

A guarantor loan is a specific type of loan product offered to people who may not be eligible to apply for a loan alone. Guarantor loans are one of the few ways of inheriting debt.

Anyone who signs a loan document as a guarantor for someone else becomes responsible for the remaining unpaid debt. So, if a guarantor offers their own home equity as a deposit (and many do), that guarantor could lose some of their property because of inherited debt.

Joint accounts

Another way you can inherit a debt problem is if you have a joint bank account with the deceased person.

For example, if you have joint names on a mortgage, you are both responsible for paying the loan.

With the right legal advice from an estate planning specialist, you can gain a better understanding of how inherited debt may affect you – and how to protect yourself.

Credit card debt

Do you have to pay your husband/wife’s credit card debt if they die?

Unless the credit card account is a joint account, the answer is ‘no’. Their estate is responsible. Fortunately, even if you’re married to someone, you don’t have to repay the debts owed by the deceased person.

However, for any joint credit accounts or a mortgage/loan that is taken out together, the surviving spouse may be liable to pay part of or all of the debt.

Repaying debt

Clear communication with creditors can help keep the situation as calm as possible. Paying off debts can feel exhausting, but by dealing with it, every repayment gets you one step closer to being debt free.

If paying off debts feels like too much to manage alone, consider strategic, practical support from a financial counsellor.

Many organisations are happy to arrange repayment plans, and may sometimes agree to waive penalty fees and charges.

The bottom line

What happens to debts after death depends on whether:

• there are any assets in the estate
• the debts are secured or unsecured
• the debts are only in the name of the deceased, or in joint names
• someone has guaranteed the debts.

Before taking out a joint account, signing as a guarantor or involving yourself with anyone’s debt, ensure you understand your obligations. And, if you do inherit debt, deal with it by communicating with your creditors and negotiating a repayment plan.

Are you in any of those categories where you may inherit debt? Do you have any guidance for other members? Share your thoughts in the comments section below.

Also read: Bank of mum and dad: Know the risks of being a guarantor

This article originally appeared on compareclub.com.au and is republished with permission. YourLifeChoices is part of Compare Club Media.

Financial disclaimer: The information contained on this web page is of general nature only and has been prepared without taking into consideration your objectives, needs and financial situation. You should check with a financial professional before making any decisions. Any opinions expressed within an article are those of the author and do not specifically reflect the views of Compare Club Australia Pty Ltd.