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Inheriting Debt: How common is it in Australia?

At a glance

  • Understanding Debt Inheritance: In Australia, you don’t inherit debt directly; the deceased’s estate is responsible.
  • Types of Debts: Learn about secured and unsecured debts, guarantor loans, and their implications on inheritance.
  • Managing Joint Debts: Discover the responsibilities associated with joint accounts and how location can impact debt collection practices.


Inheriting debt is a concern that often weighs heavily on the minds of Australians. Losing a loved one is already a challenging experience, and the thought of shouldering their financial burdens can be overwhelming. In this comprehensive article, we will delve into the legalities and circumstances surrounding the inheritance of debt in Australia. We aim to dispel myths, provide guidance, and shed light on the legal landscape governing this complex issue.


Understanding Debt Inheritance


The concept of inheriting debt in Australia often needs to be understood. Let’s begin by clarifying that individuals do not directly inherit debt when a loved one passes away. Instead, the deceased person’s estate is responsible for settling any outstanding debts. An estate comprises the sum of an individual’s assets, property, financial interests, and liabilities at the time of their death.


The Legal Framework

The legal framework in Australia is designed to ensure that a deceased person’s debts are settled before their remaining assets are distributed to beneficiaries. To manage this process, an executor is appointed, either by the deceased’s will or through intestacy laws if there is no valid will.

Executors can be family members, friends, attorneys, or professional trust companies. The executor’s role includes identifying and valuing the assets, paying off outstanding debts using available assets, and finally distributing the remaining assets to beneficiaries as per the deceased person’s will or intestacy laws.


Types of Debt and Their Treatment


The treatment of debts during the estate administration process can vary depending on their nature—secured or unsecured.


Secured Debts

Secured debts are loans backed by collateral, such as a mortgage for a house or a car loan. When a deceased person has outstanding secured debts, the creditor typically has a claim on the collateral, which may need to be sold to settle the debt. If the estate has sufficient assets to cover the debt, the executor can pay it off, and the support can be passed on to the beneficiary.

However, if the estate cannot cover the debt, the executor may sell the collateral, and the proceeds are used to pay off the loan. In some cases, a beneficiary may take over the secured debt to retain the asset.


Unsecured Debts

Unsecured debts, like credit card debt or personal loans, are not backed by collateral. The executor is responsible for paying them off using the assets in the estate. If there are enough assets to cover these debts, they will be paid, and the remaining assets will be distributed to the beneficiaries.

If the estate is insolvent and cannot cover the unsecured debts, the debts are typically written off, and the creditors bear the loss.


Inheriting Guarantor Loans

One specific scenario where surviving family or friends might become obliged to repay a deceased person’s debt is with guarantor loans. Guarantor loans are a particular type of credit product offered to individuals who may not qualify for a loan on their own merits. Generally, younger mortgage applicants with a bad or no credit score and a small deposit may require a guarantor to facilitate the home-buying process.


Also Read: Debt Collection Agencies and Various Pricing Models.


As a guarantor, you sign an agreement stating that you are responsible for the debt if the homebuyer cannot meet their mortgage repayment obligations. In the unfortunate event of your passing, while serving as a guarantor on a mortgage, the lender may seek repayment from your estate. If you have put your home equity up as collateral for the guarantee, which is a common practice, you may risk losing part of your property in the settlement of the debt.


Joint Accounts and Their Implications

Another instance where debt inheritance may come into play is when individuals hold joint accounts with the deceased. For example, if you have joint names on a mortgage, both you and the dead person are responsible for repaying the loan.

However, in the unfortunate event of your passing, your estate will be responsible for covering as much of your share of the debt as possible. If your estate cannot fully repay your portion of the loan, your joint account holder, such as a partner, may need to cover the remaining outstanding balance.

To navigate these complex situations, seeking guidance from estate planning attorneys is a prudent step. They can provide valuable insights into what happens to your home loan and property in case of your passing or that of a joint account holder. Additionally, it’s worth exploring life insurance products that may assist in managing such financial responsibilities.


Do You Inherit Your Spouse’s Debt When You Get Married?


Debts incurred by an individual before marriage are typically considered their separate responsibility and remain so even after marriage. This means that you only automatically inherit your spouse’s pre-existing debts when you get married if, once again, you are a guarantor or a co-signer on those debts.


Source: Freepik


However, couples need to maintain open communication about financial matters and gain a clear understanding of their individual and shared financial responsibilities when entering a marriage. Clear financial planning can prevent misunderstandings and ensure a harmonious economic partnership.

In cases where doubts or concerns arise, seeking advice from a legal professional can be immensely beneficial. They can guide navigating financial issues and debt management within the context of marriage.


Debts Forgiven at Death


Certain loans, such as HELP (Higher Education Loan Program) debt, are forgiven or discharged upon the borrower’s death. HELP debts, which include HECS-HELP, FEE-HELP, VET FEE-HELP, VET Student Loans, and SA-HELP, are typically cancelled by the Australian Taxation Office (ATO) upon the borrower’s death. These outstanding debts are not pursued from the deceased person’s estate.


Real-Life Examples


Let’s consider some real-life scenarios to understand debt inheritance in Australia better:


Scenario 1: The Mortgage Dilemma

Imagine a scenario where a person passes away, leaving behind a substantial mortgage on their family home. If the estate has enough assets to cover the mortgage, the executor can pay it off, and the property can be passed on to the beneficiaries. However, if the estate is unable to cover the debt, the property may need to be sold to settle the debt. In this case, the beneficiaries may not inherit the family home.


Scenario 2: Credit Card Debt

Suppose an individual had significant credit card debt at the time of their death. The executor of the estate is responsible for using available assets to pay off this debt. Beneficiaries would receive their share of the remaining assets only after the credit card debt is settled. Importantly, beneficiaries are not personally responsible for repaying the deceased person’s credit card debt unless they were co-signers or joint account holders.


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Dealing with Joint Debts


Joint debts can present a unique situation. When individuals share a joint account or co-sign a loan with the deceased, they may be held responsible for the outstanding debt. This responsibility extends even if the debt is secured or unsecured. It is essential to be aware of these obligations when entering into financial agreements with others.


Location-Specific Debt Collection


In Australia, debt collection practices can vary by location. Debt collectors in Melbourne, Sydney, and Brisbane operate under similar legal frameworks, but local regulations and procedures may differ. When dealing with debt collection agencies, it is crucial to be informed about your rights and obligations.


Debt Inheritance in Other Countries


The rules surrounding debt inheritance vary from one country to another. In most cases, when a person dies, their debts do not automatically become the responsibility of their family members or heirs, regardless of whether the debts were incurred in Australia or another country.

Instead, the responsibility for settling outstanding debts falls on the deceased person’s estate. However, the administration of debts incurred in other countries can become more complex due to differences in legal systems, jurisdictions, and international laws.

Handling these foreign debts will depend on the specific circumstances, the type of debt, the laws of the country where the debt was incurred, and any applicable international agreements. Just as with domestic debts, there are exceptions to the general rule.

For example, if you are a co-signer or guarantor of a loan, you may be held responsible for the debt, even if it was incurred in another country.

Similarly, suppose you have joint accounts or joint debts with the deceased person. In that case, you may be liable for the outstanding amount, regardless of whether the debts were domestic or foreign in origin.


Inheriting debt in Australia is a complex issue, and understanding the legal framework is vital. It is essential to dispel misconceptions about inheriting debt and recognise that individuals do not directly inherit debt from their loved ones. Instead, the deceased person’s estate is responsible for settling outstanding debts.

To navigate these challenging situations, it is advisable to seek legal advice and consult with professionals who can guide you through the estate administration process. Whether you are dealing with secured or unsecured debts, joint obligations, or location-specific debt collectors, being informed and proactive can help alleviate the stress associated with inheriting debt.

In conclusion, while inheriting debt may be a concern, it is essential to remember that proper estate planning and legal guidance can help ensure a smoother process for both the deceased person’s estate and their beneficiaries.

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