The passing of a loved one is a difficult time, and it can bring up many financial questions—one of the most pressing being whether you can inherit their debt. Generally, the answer is no, but there are notable exceptions. Let’s explore how debts are handled after someone passes away and the situations where creditors might turn to family members or loved ones for repayment.

How are debts paid when someone passes away?

When a person dies, their debts are typically repaid through their estate before any distributions are made to beneficiaries. This process is managed by an executor (appointed through the deceased’s Will) or an administrator (appointed by the courts if there is no Will).

Debts are prioritised, with tax liabilities usually addressed first, followed by secured and unsecured debts. If the estate has enough assets, debts will be paid from cash holdings or proceeds from selling property, shares, or other valuables. If the estate cannot cover the outstanding debts, insolvency rules may apply, and the debts are written off.

When can debts be inherited?

While you generally can’t inherit debt directly, there are scenarios where you may become responsible for repayment.

Guaranteed debts
When you act as a guarantor on someone else’s loan, you agree to cover repayments if they are unable to meet their obligations. For example, parents often guarantee their children’s home loans using equity in their own property.

If the borrower passes away and their estate cannot settle the debt, the guarantor may be required to take over repayments. In extreme cases, the lender could repossess the guarantor’s home if the debt remains unpaid.

Jointly held debts
Debts held jointly with the deceased—such as a mortgage—become the sole responsibility of the surviving co-borrower. For example, if one partner in a couple passes away, the remaining partner will need to continue making repayments or pay off the debt in full.

Having life insurance in place can help mitigate this risk by providing funds to cover ongoing repayments or clear the debt entirely. Without such a safeguard, the surviving borrower may need to sell the jointly owned property if they can’t manage repayments.

Secured debts against your assets
If you’ve agreed to secure someone else’s loan with one of your assets, such as a property, you could be liable if their estate cannot cover the outstanding balance. In this case, the lender may move to sell the collateral to recover the debt.

Protecting yourself from financial risk

If none of these circumstances apply to you, it’s unlikely you’ll be held accountable for a deceased relative’s debts. However, if you’ve entered into any of these arrangements—or are considering doing so—there are steps you can take to protect yourself:

  • Understand your obligations: Before acting as a guarantor or co-signing a loan, seek clarity on what you’ll be responsible for in various scenarios.
  • Evaluate your financial position: A financial adviser, like those at Halpin Wealth, can help assess whether you’re in a strong enough position to take on such commitments without jeopardising your financial security.
  • Draft legal agreements: Consult with a lawyer to ensure any agreements include protections for your interests.
  • Consider life insurance: If you’re entering into joint financial arrangements, a life insurance policy can provide peace of mind and a safety net for repayment.

Need guidance?

Navigating financial responsibilities, particularly in the wake of a loved one’s passing, can be complex. At Halpin Wealth, our advisers can help you assess your obligations, plan for contingencies, and make informed decisions about your financial future.

Contact us today to learn how we can provide clarity and support for you and your family.