When it comes to inheritance, the general notion among people is that it is all about inheriting assets. But as the saying goes, if you inherit assets, you will also inherit liabilities. It goes hand in hand.
If your parents or spouse have a debt that’s not paid within their lifetime, it becomes the duty of the legal heirs to pay that loan first. But the real question is to what extent legal heirs are liable for their parent's or spouse’s unpaid debts?
There are plenty of cases filed by creditors of deceased persons in court to receive their money back. But to what extent can creditors claim their money from the legal heirs?
1. Debt inheritance in secured loan
In the case of a secured loan, the lenders already have collateral; as a result, it is up to the legal heirs to decide whether or not they want to maintain the asset in order to settle the lender's debts. When a single borrower passes away with an unpaid secured obligation, the secured creditor may ask the borrower's legitimate heirs to settle the amount, but they cannot be compelled to do so. Whether or not the loan obligations will be fulfilled is up to the legal heirs.
The mortgaged asset may be sold by the lender to satisfy the obligation in the event of non-payment. If the co-applicant/legal heir is unable to pay back the loan, the bank seizes the property and sells it at auction to reclaim the money.
a. Liability in a jointly owned debt
The responsibility for repaying the debt is transferred to the co-borrowers when a loan is taken out jointly by two or more borrowers. The original applicant's responsibility to repay the loan is transferred to the surviving co-applicant or joint debtor when a borrower takes out a loan with another co-applicant.
2. Debt inheritance in unsecured loan
Legal heirs cannot be forced by a lender to repay an unsecured debt like a personal loan or credit card debt. A deceased person's property cannot be seized to cover an unsecured debt since there is no security to back up the loan. Furthermore, the lender cannot pursue outstanding debts against the decedent's surviving partner or legal heir if the debtor passes away before repaying an unsecured loan. But if the legal heir has inherited any property the situation changes as follows:
a. Debt will be paid first from the inherited assets:
It is established law that if you inherit any property and your parent or spouse left an unpaid debt, the debt will be paid out of the inheritance first, and then the remaining assets will be distributed among the lawful heirs. A creditor's ability to assert his legal claims against the legitimate heirs of their deceased debtor to recover money cannot be denied.
b. Debts will never be paid out of the inherited assets:
You don't need to use your own money or self-acquired assets to pay down the debt if it exceeds the value of all of your inherited assets. It is again a settled position of law that the legal heirs need to pay the debt from their self-acquired property.
What should legal heirs do?
A legal heir must first determine the value of the decedent's assets and their responsibilities before taking any action. It is your responsibility to pay off the property you have inherited to settle any debts with the deceased's creditors. You cannot be forced to pay a creditor with the property that is not inherited by you.
Therefore it is generally advised that you should mention your debts in your Will too. Then it doesn’t come as a shock to your legal heirs and keeps them prepared and saves them a lot of time and money. It prevents unnecessary litigation which keeps on going for years and years.