Debt doesn’t have to be scary. If you use debt responsibly, it can be part of your long-term strategy to create a better future. Debt can be a good money choice, if it’s affordable and you have the discipline to make all your payments on time. 

It may be an uncomfortable subject that nobody wants to think about too much, but if you were to pass away unexpectedly, what would happen to your debt? And how would it affect your family’s future?

Debt settlement after death

You’ll be happy to know that your next of kin are not automatically responsible for your debt if you die. Your estate – the money and assets that you leave behind – will be responsible for settling that debt. The exception is anyone who took on a debt with you as a guarantor or co-signer (for example, on a joint home loan) – they will be responsible for that specific debt. However, even though your loved ones won’t be responsible for it, settling the debt from your estate might still affect their financial future.

After you die, your estate is put under executorship and an executor is appointed to oversee the process of paying off your debt and distributing the remaining money and other assets.

If you die without leaving a will, your estate will be finalised according to the Intestate Succession Act. The Master of the High Court will appoint an executor, who will pay off debt with the money in the estate before the rest is paid to your beneficiaries as determined by the Act. If there isn’t enough money in the estate to pay off all your debt, the executor will sell other estate assets to make up the shortfall, which will reduce what’s left over to share among your loved ones. 

If you make a will, you can name your own executor – this could be a law firm, a bank or someone you trust. The first task of an executor is to verify the authenticity of the will. Once the will is validated, the executor becomes the protector of all assets and must act in the best interest of the estate.

The executor will then put an advert in the local newspaper and the Government Gazette informing creditors that you have died and asking them to file claims against the estate within 30 days of the advert date. This protects your family from any creditors making claims on your estate after it has been finalised. As with an intestate succession, if there isn’t enough cash available in the estate, the executor will have to sell some or all of the estate assets to pay off your debt. Again, this will reduce the amount left over to go to the beneficiaries named in your will.

Learn more about how to manage a deceased estate.

The difference between secured and unsecured debt

Secured debt is debt that uses an asset as collateral – such as a home loan or vehicle finance. The lender retains ownership of the house or car until the loan is paid off and can repossess it if the debt is not paid. If your spouse or another family member co-signed the loan with you and they can keep making the loan payments, they will be able to keep the asset and continue paying the debt on their own. In the case of a home loan, the guarantor or surviving spouse must apply for a section 45 or 57 endorsement to transfer the property into their name. 

If there are no co-signers on the loan, however, or the co-signer is not able to keep paying the instalments, the executor must use money from the estate to pay off the loan in full before the estate is finalised. If there are not enough assets or money in the estate to do this, the executor will have to sell the car or house to pay off the debt.

Unsecured debt like a credit card balance or personal loan, does not have any collateral for the lender to repossess. Unsecured debt must be paid off in full using the money or sale of assets in the estate. If there isn’t enough in the estate to cover all your debt, the estate is declared insolvent. The executor will sell all the assets and use whatever money is recovered from the estate to pay off as much debt as possible. The remaining unsecured debt will be written off, but there will be nothing left to distribute among your surviving family members, even if you made a will.

The importance of estate planning and credit life insurance

A will is an essential part of estate planning, because you can use it to decide how your family should tackle your debt if you die suddenly. For example, your will could specify that the executor pays off your home or car loan with a portion of the proceeds from your life insurance policy. This will allow your family to keep those assets when you’re gone, and your will can still distribute the remainder of your life insurance payout among them to help them stay financially stable.

Another good idea is to take out credit life insurance to cover your debt if you pass away. Choose credit life policies that will pay off all your debt, secured and unsecured, in the event of your death, and you’ll have peace of mind knowing that all the money and assets left in your estate will go to the beneficiaries named in your will. 

Responsible debt management, including credit life insurance, is key to making sure that you use debt to improve your life and don’t saddle your family with a burden after you’re gone.