What happens to your debts when you die?

Published Mar 16, 2017 – By Loanstreet


In the context of Malaysian law, have you ever wondered what happens to all your loans and credit card debt when you die? Does one get off scot free? Or do our loved ones end up paying for it? This lack of understanding is the reason many of us end up being harassed by creditors of the recently deceased, or how we end up putting our own loved ones at risk from harassment when we die.

We receive this question in many forms so many times a year, we thought it would be worthwhile to put this question to rest once and for all.

Who has claim to our estate?

When we die, all the worldly possessions that are left behind goes into something called our ‘estate’. Our estate will be administered by an Executor who can either be nominated in our will, or can be court appointed if there is no will.

An executor’s responsibility is a heavy one indeed. It is the Executor’s job to approach the Probate Office to get a letter called the grant of Probate as soon as possible. This gives authority for the Executor to carry out his or her task of administering the estate immediately.

But before the inheritance can be distributed, legally, there are certain parties who will have a right to make claims against your estate. By law:

What if there isn’t enough to pay off secured loans (car loan, home loan)?

Typically, banks would give the beneficiaries and next of kin the option to take over the loan and have the asset (e.g. house, car) transferred to their names. If this is not agreeable, then the creditor has the right to foreclose / repossess the underlying asset that was pledged. The proceeds of the sale by the bank will be used to pay off the outstanding loan amount, and any remaining amounts released back to the estate.

What if there isn’t enough to pay off the unsecured loans (personal loan / credit card)?

If there are guarantors, the guarantors will assume the responsibility for the loan. Otherwise, there are 2 possibilities.

If you did not leave behind any possessions of value in your estate, creditors will have no choice but to write off the debt. In such cases, creditors cannot 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 / stocks), creditors could choose to sue your estate to claw back what is owed them. This could delay the distribution of the inheritance.

For all practical purposes, it makes sense for the next of kin to continue paying the instalments on behalf of the deceased and make claims against the estate later to prevent accrual of late payment charges, as well as prevent any delays to the distribution of the inheritance. This buys time for the executor to liquidate any assets for settlement of the debts.

Can I transfer my house / car to my family before I die to keep it out of my creditor’s hands?

Only if it is free of encumbrances. Meaning, it is not already pledged as collateral.

Also, if it was done just prior to your death with the intent of escaping your creditors and a case can be proven, your creditors may sue your estate to claw back what is owed them. At that point, it is for the courts to decide if they have any rightful claim to it.

The longer the transfer has been enacted, the safer it is from creditors.

What steps can I take to protect my loved ones?

The free of cost 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. This could mean continuing to pay monthly instalments as if you were still alive (to prevent accrual of late payment charges), and even information such as how to access your internet banking accounts / ATMs should you suddenly become unavailable.

Another free of cost measure that those who are well advanced in age or are terminally ill can take is to pre-arrange a transfer out of any assets that are free from encumbrances to your loved ones. This way, instead of becoming your estate to which creditors get first right, some, if not all of it would already have been transferred well out of reach of your creditors.

It could well be worth the investment to also take up debt insurance (E.g. Mortgage Reducing Term Assurance (MRTA), credit card insurance, Personal Loan insurance) for any loans or credit cards that you have. By doing so, you do not saddle your estate with debt, leaving less than you desired for your beneficiaries.

Finally, it may also make sense to engage the services or a good lawyer or will writer to be an executor for your estate for a fee. As professionals, they are the best people to advise you on the best practices on protecting your next of kin in the event of your demise, or even to provide to your next of kin on what to do next.

Importance of a Will and/or Trust

People usually aren’t sure about the importance of creating a Will or Trust; the only question you would need to consider is that of control. Who would you want to be in control of your amassed wealth (no matter how big or small)? Surely you would choose your close friends and family to be able to have the power to distribute it amongst themselves, since you know their characters well and trust them.

Those with foresight will tell us that death does not mean the end of our financial responsibilities, it just changes. Preparing for that change is vital, because you wouldn’t want to put your loved ones through the stress of having to deal with a legal tangle immediately after someone they care about has passed away.

But what is the difference between a Will and a Trust? The former is a legal document that allows for your loved ones to perform a variety of actions; some of these include planning for your funeral, nominating guardians for any children that are still minors and naming the executor of your estate.

The latter is a legal instrument that usually allows you to minimise the taxes imposed on gifts and estate. More importantly, it allows you to put conditions on how your assets are to be distributed after you have passed on. For example, if you leave a sum of money to your children, you would be able to use a Trust to restrict the usage of it for their education only.

You can also choose to assign all of your moveable and immoveable assets to a Trust and just have a very simple Will. There are two main types of Trusts for one to consider: revocable and irrevocable.

A revocable trust is one which lasts for as long as the individual is alive; you would have full control over it, and even cancel it at any time you wish. You can also choose to designate a beneficiary to receive the funds within it after your death, but it would be subject to estate taxes. An irrevocable trust is named as such because it cannot be dissolved nor can the terms be changed once it has been executed. This type is able to lessen the chances of your estate getting taxed.

It is always a good idea to review the contents of the Will and/or Trust every once in awhile, and make sure that it is updated, especially if there are major changes in your life. These events can encompass births, deaths, marriages, divorces or dramatic shifts in the nature and/or value of your estate.