When debt follows you into the grave
Your debt might not haunt you in the afterlife, although it could torment your family for years to come if your affairs are not in order or if they’ve accepted liability for it.
Debt is an issue parents and couples should factor into their estate planning, because they could inadvertently saddle their surviving partners or offspring with unpaid bills that are collectable.
While suppliers might express their condolences to you and your family, they expect - and are sometimes entitled to - payment.
Nicky White, franchise principal of the Sanlam Bluestar Business for 2018/19, says parental debt highlights the importance of legacy planning while you’re alive and of sound mind.
“This is one of the biggest reasons for having a will in place, because your last wishes need to be made clear and an executor of your estate must be appointed,” White says.
“Their biggest task is to pay off all the debts in order to distribute the balance to the beneficiaries. But if there isn’t enough liquidity in your estate to pay off your debt, the executor will have to sell off any assets to service the debt.”
Who owns the debt?
Not all debt is collectable after death, though. Liability hinges on a number of factors: whether the deceased had an estate, if someone else guaranteed their debt, and their marital regime.
When there is equity in an estate - whether it be life policies, vehicles, homes or any other assets - that can be sold in order to pay off the debt, creditors are always paid first, before any beneficiaries of a deceased estate.
Once that’s settled, the balance of the funds will be distributed in accordance with the will, says attorney Michelle Dommisse.
“When we wind up the estate, we get our letters of executorship, which are issued by the Master of the High Court, to authorise us as the executors,” she says.
“One of the first things we do is to attend to outstanding accounts. We always make payment before any benefits can be derived from the estate.”
Dommisse says creditors have up to three years to make claims against deceased estates, which is when prescription sets in.
Life policies, though, do not automatically form part of the estate because they usually pay out to specific beneficiaries, not estates as such. That is, unless the life policy stipulates that the estate is a beneficiary, in which case the life cover amount stipulated for the estate would be used to pay off any outstanding debts.
For couples married in community of property, all the assets, debts and liabilities from before and during the marriage are shared jointly. This is a risky marital regime, because it spreads liability between both partners - including after death.
When someone dies with no estate or assets to pay their outstanding debts, their children or surviving spouse (who is married out of community of property with or without accrual), are not responsible for their debts.
But if adult children or any others sign as a guarantor for any asset or debt, they are legally liable for the balance of their parent’s debt.
If the estate is insolvent, and no one signed as guarantor, creditors have to write off the debt, which is VAT deductible.
For the Naidoo family (not their real surname) of Durban, when their dad took ill - a state pensioner with no medical scheme and a R1700 monthly grant - the children decided that he deserved the best care, “no matter what”.
Despite treatment, the family patriarch died soon after he was discharged from hospital earlier this year. And when the bills started rolling in for hospitalisation, a cardiologist, four doctors and a pathologist, none of the children was able to afford them.
The children paid a substantial deposit for hospitalisation and the brother had co-signed on many of the accounts - despite being in precarious work - and now, the proverbial wolves were at the door, insisting on payment.
Medical services providers are not registered credit providers, which is why they insist that accounts are settled by private patients after treatment, or where medical aid funds are exhausted.
For the Naidoos, a payment arrangement needed to be made because money was due to the suppliers of services.
And for a financially stressed family, this was a burden they could ill afford.