Death of a parent in debt: what it means for the children
The death of a parent can be a very traumatic event and their unpaid debt can be a huge concern for the family members left behind. Does the family have to pay off the debt of their deceased parent? Or does their debt get written off once they’ve passed on? According to David Weare, Franchise Principal at Momentum Consult it is an either-or situation.
In South Africa, almost half the population is in some form of debt. In its 2017/18 annual report, the National Credit Regulator (NCR)‚ revealed there are currently close to 25 million indebted consumers. Most of these (over 60%) were “in good standing” and up to date with their repayments, but nearly 40% were behind with their loan repayments.
According to Weare, there are two important financial situations to note in the event of a family member dying with debt. The first example is of a person who passes on who has no estate or any assets that can be used to pay off outstanding debt. In this instance, this person’s children cannot be burdened with the late parent’s debt and it has to be written off. There is an exception, however, and this is when the children (over 18 years old) have signed as a guarantor or co-signed for any asset or debt. In this case they are held responsible for the remaining balance owed on the parent’s debt.
In the second example, the late parent has assets – and this could be in the form of a home, a car, a life policy, etc. In this case their debt will be paid off using the equity in the mentioned asset. “It is important to note that creditors will always get paid first, before beneficiaries of a deceased estate. Only once all debt has been settled from the estate (this can take a number of months, and sometimes years), the remaining balance of funds will be distributed to the deceased’s heirs, according to their will,” explains Weare.
In a case where a deceased person has a life policy, the policy will not automatically be swallowed up by outstanding debt, as it pays specific beneficiary/beneficiaries. That is, unless, the policy stipulates the estate as a beneficiary, in which case the life cover amount stipulated for the estate would be used to pay off any outstanding debt. “If the beneficiaries are natural persons and not the estate, the life insured amount would be paid directly to the beneficiaries and will not form part of the Estate or be used to pay off any debt in the deceased’s name,” says Weare.
To avoid hassles and financial complications for their estates and families, people should ensure that they have a will in place to stipulate exactly what their wishes are regarding their assets and debt. “If you have any assets that still have debt attached to them, such as a home loan, ensure that you have the correct cover in place to cater for the outstanding debt, so that in the event of your passing, the debt is paid off and the asset then forms part of your estate with no debt attached to it,” Weare explains.
Weare recommends meeting with a financial adviser – this is a free service from financial services companies - to conduct a detailed financial needs analysis based on a person’s goals and objectives to achieve their personal financial wellness needs. This will not only highlight shortfalls in your financial planning that can then address while you’re still alive, it will also give you piece of mind that your outstanding debt will not affect your family.