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Who pays the debts when someone dies?

Posted on 10th February 2021
Catherine Henry Lawyers
Catherine Henry Lawyers

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Who pays the debts when someone dies

Before any of the beneficiaries of a will can receive anything from an estate, the debts of a person who died must be paid from the assets of the estate.

If the cash funds in the estate are not enough to pay the debts, the executor (the person responsible for implementing the will) must sell any assets or property to cover the costs of the debts. This includes selling assets that have been specifically gifted in the will.

An example: Carl’s will

When Carl died his assets and liabilities were:

  • a bank account with $107
  • a credit card debt of $3,233
  • a car worth $6,000
  • $200 in unpaid rent

In his will, Carl left his car to his sister Deb and the rest of his estate to his brother Ken. His assets are worth $6,107 but his debts are $3,433. Even though the car has been gifted to Deb, it needs to be sold to pay Carl’s debts.

Superannuation & life insurance

A person who dies may have had superannuation or life insurance. If they had made a binding death nomination, the payment is made directly to the person or persons nominated to receive their superannuation or life insurance. The beneficiary receives the funds and does not have to use the funds to pay the debts of the person who has died.

If the person who died did not make a binding nomination or nominate someone, an eligible person may apply to the superannuation fund or policy holder to receive the payment. The executor can also apply to have the payment made into the estate. The funds can then pay any debts of the person who has died.

What if there are still not enough funds in a will to pay debts?

Who pays the debts if there are still not enough funds in the estate, even after the executor has sold assets and applied for the superannuation and life insurance?

The executor and the beneficiaries do not have to pay the debts. Instead, the executor should write to the person or company to whom the debt is owed (the creditor), advise them that the estate is unable to pay the debt and ask for it to be waived.

If the creditor will not agree to waive the debt, or if the debt cannot be waived, the executor can apply for the estate to be declared bankrupt if the debt is $5,000 or more.

If you need help administering a bankrupt estate or managing estate debts, contact Catherine Henry lawyer’s expert Estates & Elder Law team. Call 1800 874 949 or fill in the form below, and we will be in touch.

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