Debt and Death | Debt Rescue Blog

The pain of losing a loved one, changes all of us. The pain of losing a loved one affects each one of us. Losing a loved one changes us and impacts our lives in many ways. The last thing that you want to be concerned about is any financial obligations, or debt, while you are grieving.  

We all have common fears when we think about our own death:

• What will happen to my family when I die? 
• Will they inherit my debt, or will my debt eat into their inheritance? 
• Have I made the right choices, or will they suffer even more after my passing? 

In today’s Debt Rescue blog article, we will discuss some of the most common myths about death and debt, and we will give you valuable advice on how you can protect your family and loved ones from financial distress. 

To make things a little easier for you, we have included an index where you can choose which sections you would like to read. We’ve also added a video that captures the highlights of this blog. You can choose to read the blog, watch the video, or do both, whatever suits you best!

Myth 1 – Debt Follows You to the Grave and Beyond

Married couples often fear that they will be left with the debt of their loved one. This is usually not true, but there are some exceptions: 

The financial responsibility for a deceased spouse’s debt depends on how you were married: 

• Married in Community of Property: When you are married in Community of Property, spouses will share ALL assets and liabilities. This means that both spouses are equally responsible for any debts incurred during the marriage. When your spouse passes away, you may be liable for the debt, because their debtis seen as jointly owned. 
• Married Out of Community of Property (with or with accrual): Debts are considered separate unless both spouses co-signed or guaranteed a loan. If your spouse incurred debt individually, you will not automatically be responsible for settling it. 

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Myth 2 – Debt will Eat into Your Inheritance 

There is a widespread myth that debt attaches to a loved one permanently, even after death. This is not true.  In some cases, however, debt can unfortunately indirectly affect the inheritance process. 

Before heirs (the recipients) can receive their share of an estate, all debts must be settled in full. If the loved one that died had a substantial amount of debt, their debt could consume the entire estate, leaving little or nothing for the beneficiaries. 

Explanation of Estate:

After someone dies, all of that person’s property and belongings that have monetary value (such as real estate, vehicles, money in the bank, stocks and shares, insurance policies, and household goods and jewellery) form the person’s “deceased estate”

Let’s look at two examples: 

1. If your loved one owned a property worth R2 million but had R1.8 million in outstanding debt, then only R200,000.00  would be left for the heirs. 
2. If the debt exceeds the estate’s value, then no inheritance will be distributed, and the property may be sold to cover the outstanding debt. 

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Myth 3: The Living Spouse Automatically Gets All the Debt

This is not always the case, but it does depend on how the couple was married: 

• Married in Community of Property: The surviving spouse will share the debt equally. For example, if a loan was taken out during the marriage, the spouse will remain liable for it. 
• Married Out of Community of Property (with or with accrual): The surviving spouse is not liable unless they co-signed for the debt. 

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What Happens to Debt When a Loved One Dies?

When your spouse passes away, their estate becomes responsible for settling all their debts. The estate includes all assets and liabilities (their liabilities includes the debt that they owed) of your spouse.

The Executor of the estate will do the following: 

1. Use any available assets to pay off the debts.
2. Distribute any remaining assets — after the debts are settled in full — to the heirs. 

If the debts exceed the value of the estate, then the estate will be declared insolvent. In these cases, creditors will not pursue the surviving spouse, unless they co-signed for the debt. 

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How to Protect Your Family from Your Debt after Death

You can protect your family and their future from any distress (distress as a result of your debt) by taking the following proactive steps: 

1. Plan Ahead: Create a comprehensive estate plan with the assistance of a financial advisor. This well structured plan will outline how debts will be settled, and how your assets will be shared amongst your family. 
2. Life Insurance Policies:  It is important to have adequate life insurance to cover any remaining debts, funeral expenses, and crucially, to provide financial stability for your loved ones after your passing. 
3. Your Marriage: If you are married In Community of Property, be aware of the financial implications. It might be wise to consult a financial planner or a lawyer to explore options such as a prenuptial agreement or postnuptial contract to safeguard your loved ones. 
4. Setting up a trust fund: A trust allows you to protect your assets for your family, ultimately shielding them from creditors once you have died. 
5. Credit Life Insurance: This type of policy ensures that specific debts are settled upon your death, safeguarding your family’s home, estate and inheritance. 

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Debt After Death: Annaline van der Poel 

This video from Money Moves with  Annaline van der Poel, COO of Debt Rescue, tackles a sensitive yet very important topic – death and debt. Many South Africans worry about their loved ones inheriting their debt or losing their inheritance to creditors. The video also explains the top three debt and death myths, explaining how debt is handled in estates, the role of the different types of marriages, and how planning ahead can protect families.