Explainer: What happens to your debt when you die?

The common saying is that the only things which are certain in life are death and taxes – but what happens if you die and haven't paid your taxes?

How your debt is handled after your death can vary enormously depending on the type of debt you have, the size of that debt and the assets you have to your name.

Of course it must be mentioned that estate law can be extremely complicated and situationally dependent – so while this is a general guide, it is absolutely in no way a replacement for seeking professional advice.

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What happens to your debt when you die? Does it just disappear?

It doesn't just disappear, and how your debt is handled depends on what kind of debt it is.

On a very basic level, once a person dies all of their debts must be paid before any benefits can be given to beneficiaries (such as spouses or children).

This is handled by a person known as an "executor" or in some cases an "administrator".

Generally a deceased person's debts are paid for using the value in their estate (such as a property or other goods). Any other value left in the estate then goes to the beneficiaries listed in a person's will.

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Are their different kind of debts?

Yes there are.

There is secured and unsecured debt. Secured debt is anything that is tied to an asset which can be sold to repay the debt.

Secured debt includes things such as a home loan or a car loan. A property can be sold to pay off a mortgage, and car can be sold to pay off the remainder of a loan.

Then you have unsecured debt, which means there's no particular asset tied to the loan.

This generally includes credit card debt and personal loan debt.

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What if a person's estate doesn't have enough money to pay all of their debts?

If a person's estate doesn't have enough money to pay all of their debt – dubbed an "insolvent estate" – things become more complicated.

Generally if an estate is insolvent the debts will be arranged into a priority order with the most pressing – such as tax – paid first. Credit card debt as unsecured debt would be near the bottom of the order.

There can be complications here depending on a person's source of income, their superannuation and other ongoing financial costs.

The executor of an estate is responsible for checking if there are any assets that can be used to repay a debt.

Can other people be responsible for a deceased person's debt?

Traditionally, family members or spouses do not inherit debt because any debt is paid before assets are given to the beneficiaries of a will.

In saying that, there are some circumstances in which other people could be responsible for paying the debt of a deceased person.

For instance, if a family member personally guaranteed a deceased person's unsecured debt or has an asset which has been used as security for a loan, or is a joint borrower, they may be responsible for the debt.

Outside of the above conditions, if a person's estate cannot pay debts it's unlikely the beneficiaries of the will be held liable to pay them.

This is all so confusing … is there anywhere where I can learn about what to do in my will and who to make an executor?

Yes. The NSW Trustee and Guardian website has excellent resources for wading through the complexity of dealing with a deceased person's estate.

Alternatively, you could employ the services of a wills and estate lawyer to oversee your situation.

Australians concerned about debt can receive help from the National Debt Helpline on 1800 007 007

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.