When someone dies—what happens to their debt? (Explained)

Debt and death are two things most of us would rather not think about.

But what happens when those two meet…

What happens to a person’s debt when they pass?

It’s a serious question, and understanding the answer can help eliminate a lot of confusion (and stress).

Here’s what happens.

 

What happens to your debt when you die in South Africa?

When a South African dies, their debt becomes part of their deceased estate. Which must be settled before any inheritance is distributed. If there is enough money, then the estate repays all of the creditors. If there isn’t enough money, then creditors get what they can. But beneficiaries of the estate, like family members, are not responsible for the debt unless they co-signed loans or are married in community of property.

Every estate has an executor who uses the estate’s assets to pay off all outstanding debts. Including both secured loans like home loans and unsecured debts such like credit cards or store accounts. If there isn’t enough money in the estate, it is insolvent, and creditors may not be fully repaid. 

So, no-one inherits debt.

But what happens if you inherit a car or a house that isn’t paid off?

Great question. Let’s find out.

 

 

Secured vs unsecured debt

The type of debt plays a significant role in how it is handled:

• Secured debt: Loans like home loans or car finance that are tied to specific assets (e.g., the house or car itself) are secured debts. If these debts remain unpaid, the creditor may repossess the asset to recover their funds, or the executor can sell the asset to pay creditors.
• Unsecured debt: Debts like personal loans, credit card balances, and retail accounts are not linked to specific assets. These are paid out of the remaining estate assets, such as cash savings, investments, or property proceeds.

 

Secured debt comes with collateral, while unsecured debt doesn’t. That’s the key difference here.

Don’t worry. We’ll get to what happens when you inherit a financed car in a sec.

 

Who is responsible for paying back debt after someone dies?

The deceased’s debts are settled from their estate by an executor. Beneficiaries are not responsible for paying these debts unless they co-signed a loan, acted as a surety, or were married in community of property. If the estate doesn’t have enough money or assets, unsecured debts may remain unpaid, and creditors may incur losses.

In most cases, no one else is personally liable for the deceased’s debts unless they:

1. Signed as a surety or co-signed the loan agreement: This means they legally agreed to take responsibility for the debt if the primary borrower (the deceased) could not pay.
2. Are married in a community of property: In this marital regime, spouses share all assets and liabilities, meaning the surviving spouse may be responsible for debts in the joint estate.
3. Inherited a secured asset: For example, if a family member inherits a financed vehicle, they may need to take over the repayments to keep the vehicle.

 

If the estate doesn’t have enough assets (including money) to cover the debts, the estate is declared insolvent. In this case, creditors may only get a partial payment or none at all. But, beneficiaries are not required to use their own funds to settle the deceased’s unsecured debts.

What a relief, right?

 

Frequently asked questions

How long does it take to settle a deceased estate in South Africa?

Settling a deceased estate in South Africa can take anywhere from six months to several years, depending on the complexity of the estate. The process involves appointing an executor, settling outstanding debts and taxes, verifying claims, and distributing the remaining assets to beneficiaries. Things like missing documents, disputes among heirs, or large or insolvent estates tend to cause delays.

In short, it’s not a quick process—be prepared for a bit of a wait.

Steps to settle a deceased estate:

1. Report the estate to the Master of the High Court: The first step is to inform the Master of the High Court about the death. They will appoint an executor to handle the estate. This process can take weeks or even months, depending on workloads and how quickly documents are submitted.
2. Collect and organize estate details: The executor must gather all the information about the estate, including assets, debts, and beneficiaries. They also need to advertise in the newspaper for creditors and confirm any claims made against the estate.
3. Settle debts and pay taxes: The executor uses the estate’s assets to pay any outstanding debts and taxes. This must be completed before beneficiaries can receive their inheritance.
4. Distribute the remaining assets: Once all debts are paid and the legal requirements are met, the executor distributes what is left of the estate to the rightful heirs.

 

It sounds like a lot, right? That’s why estate planning is such a valuable step to take in advance.

 

 

What happens to a financed car when someone dies in South Africa?

When someone dies in South Africa with a financed car, the debt becomes part of their estate. The executor must either settle the outstanding finance or allow the lender to repossess the car. If an heir wants to keep the vehicle, they can negotiate with the lender to take over the repayments. To transfer ownership, the executor needs to settle the debt, obtain a letter of executorship, and complete the registration transfer at a traffic department.

How it works:

1. Outstanding debt: The financing agreement does not automatically end upon death. The outstanding balance becomes a liability of the estate.
2. Secured asset: Since car finance is secured debt, the lender has the right to repossess the vehicle if repayments are not maintained by the estate or an heir.

 

If someone in the family wants to keep the car—here’s what needs to happen…

 

Transfer of vehicle ownership in case of death

If a family member or heir wants to keep a financed car after a family member dies, they must first settle the outstanding car finance or arrange to take over the payments with the lender. The executor needs to obtain a letter of executorship and provide it, along with other required documents, to the traffic department. Once the debt is cleared or reassigned, the vehicle’s registration can be updated to reflect the new owner’s name.

How to transfer vehicle ownership in case of death:

1. Get a letter of executorship: This is a legal document from the Master of the High Court that gives the executor permission to manage the deceased person’s belongings.
2. Settle the car loan: The executor needs to make sure the outstanding car loan is paid off in full before the car can officially change owners.
3. Update the car registration: The new owner must take the car to the traffic department and update its registration details. They will need to bring documents like the deceased’s ID, death certificate, and proof that the loan has been settled.

 

If no one wants to keep the car (with its outstanding debt), then the executor may sell it to settle the debt. If there is a surplus, it adds to the estate’s value.

 

Final thoughts

And there you have it: a clear guide to what happens to debt after someone passes away in South Africa.

The key takeaways?

• You won’t inherit the debt.
• To keep a financed car or house involves settling the debt or taking over the loan.

 

Proper estate planning can save loved ones a lot of stress and uncertainty. It’s worth taking the time to organize your affairs now so they can focus on celebrating your legacy later.

If you’re struggling with debt, and want to make sure your family inherits something when you pass, we could help. Our service helps reduce how much debt costs every month, making it easier to repay. Try our online assessment at My Debt Hero to see if you qualify.