So, what will happen to our debts when we die?
We tend to get this question in different ways throughout the year and decided that it would be worthwhile to put it to rest once and for all.
When you're alive, your property (which includes assets and liabilities) is just called 'your property'. You own and are responsible for them. Simple. However, upon your death, your property will be called your 'estate'.
Legally, your assets will be used to pay off your outstanding debt before any remaining balance gets distributed to your intended recipients or beneficiaries. Before all that, though, your net worth will have to be determined.
How do we calculate your net worth? Well, you’ll need to add up everything you own from the value of your home to the cash in your bank account (assets). Then, minus it with the value of all your debts like mortgage, car or student loans, or even credit card balances - you’ll get the figure.
Assets - Debts = Net worth
Here’s what you need to know:
If your total debt is worth more than your total assets, then you have a negative net worth and would be considered bankrupt. In this case, your assets will be used to pay off your debts and therefore, will not be passed on to your beneficiaries.
Nevertheless, if your estate is worth more than your debt, this means that you have a positive net worth. Your estate will be passed on to your beneficiaries as indicated in your will once it’s been used to repay your debt.
Okay, who can recover your outstanding debt from your assets?
First, do know that your estate will be administered by an Executor/Wasi, a person appointed by a will-maker to execute the terms of a will. If there’s no will, then the court will appoint someone to manage it, who’s usually known as the Administrator.
An Executor’s responsibility is a heavy one indeed. It’s the Executor’s job to get a letter called the grant of Probate from the Probate Office, as soon as possible. This will grant the person the authority to carry out his/her task of administering the estate immediately
But, before the inheritance can be distributed legally, certain parties have a right to make claims against your estate (as mentioned previously). They include, but are not limited to:
- personal or business loan under your name
- auto loan under your name
- student debt under your name
- credit card debt
- your final income tax as calculated by the Inland Revenue Board (IRB)
You can refer to the above image for better understanding.
But, what if my estate is not enough to pay off my debts?
Newspaper cutting from Berita Harian
For secured loans (car loan or a home loan), banks would give the beneficiaries and next of kin the option to take over the loan and have the asset (e.g. house or car) transferred to their names.
But, if this is not agreeable, then the creditor has the right to foreclose or repossess the underlying asset that was pledged (the collaterals). The proceeds of the sale by the bank will be used to pay off the outstanding loan amount. And, if there are any remaining amounts, it will be released back to the estate.
As for unsecured loans (personal loan/credit card), if someone else was jointly liable on the debt together with the deceased, the surviving co-signee will have to repay the rest of the debt on their own. The same thing follows if the beneficiary is a guarantor of the guaranteed debt.
If you didn’t leave behind any possessions of value in your estate, creditors will have no choice but to write off the debt. In such cases, creditors can’t go after the descendants and next of kin of the deceased.
However, if there were other possessions in your estate (e.g. house, car, cash or stocks), creditors could choose to sue your estate to get back what is owed to them. Bear in mind that this could delay the distribution of inheritance.
For all practical purposes, it makes sense for the next of kin to continue paying the instalments on behalf of the deceased, accumulation of late payment charges, as well as delays to the distribution of the inheritance. The person who made the payment can later make claims against the estate. This will also help the executor to buy time to liquidate any assets for settlement of the debts.
Then, what are the steps that I can take to protect my loved ones?
The first measure to take is to make sure your loved ones are educated about their rights as heirs and are well prepared for what to do in the event of your demise. Additionally, you could write a will and try to reduce/pay off your debt as fast as you can, to protect the willed assets that you’ll leave behind.
Besides that, investing in debt insurance (e.g. Mortgage Reducing Term Assurance (MRTA), credit card insurance, Personal Loan insurance) for any loans or credit cards that you have could be worthwhile too.
By doing so, you won’t burden your family with debt, leaving less than you desired for your beneficiaries. Yes, they may be a little pricey now, but there's no price too expensive for peace of mind, right?
Another good suggestion would be to get life insurance…
Yes, it may look like it’s NOT important now for you, but everyone agrees that death is inevitable. Think about your family's well being, and how they’re going to endure all this predicament while mourning for their loss.
With the right amount of life insurance coverage in place, there’s still hope. Your family can be assured of the coverage amount that you had purchased. It pays out a lump sum benefit once all the necessary paperwork e.g. producing the death certificate, which has been filed and approved.
The money can be used to sustain their lifestyle or cover lost income. Your life insurance policy can also be designed to make sure your loved ones aren’t shouldered with hefty repayments or reduced inheritance. This can be particularly important if you share a debt, like a home loan, with your spouse or someone else.
So if you’re a sole or primary breadwinner with debts, it’s vital to get life insurance to lessen financial burdens at a time when surviving family members are dealing with the loss of a loved one. Although many people think that life insurance is expensive, not PRUWealth Plus. It offers a flexible premium based on your financial capability. This investment-linked insurance plan provides high protection up to age 100 and for entry as early as 30 days old.
Not sure how the plan can benefit you and your family? Take a look at the illustration below.
For more info about PRUWealth Plus, head over to Prudential’s page here or contact your friendly Prudential agent. Don’t worry if you’re unsure of how much coverage you should be getting because he/she will be able to provide advice based on your financial needs and goals.
And, it’s good to know that you won’t be weighing down your loved ones with your debt when you die.