21-Jan-2016 written by : FSI-Team
In the unfortunate even of death of a family member, the palpable question that arises in is that what happens to the assets and liabilities of the deceased? How will the assets get passed on and how what implication would an outstanding loan would have on the legal heir. Especially in today’s time, when non-repayment of loans adversely impact the CIBIL rating of individuals. A low CIBIL score can lead to inaccessibility to credit facilities.
First and foremost, it is important to note that when a family member dies, the debt does not automatically gets passed on to the next of kin, or surviving relatives. The debt passes on to the deceased’s ‘estate’, which is the individual’s assets including money and property. Typically, all debts need to be cleared before any claims can be made on the estate, irrespective of whether or not the deceased has made a will.
The first thing to do would be to take stock of the debt that requires to be repaid as well as the money/ other assets available. For this, it would be prudent to intimate the financial institution or bank about the death, following which you would be intimated as to the amount of outstanding debt. With that sorted, you would also need to check on the assets that the deceased owned, either singly or jointly. These assets would possibly need to be liquidated in order to repay the outstanding debt.
Check the kind of debt outstanding, i.e. whether joint or individual debt. Simply put, you would need to check whether the loan was availed of singly by the deceased, or jointly with someone, such as a spouse, partner or child. If the loan was availed of solely by the deceased, the repayment would need to be made from the estate, while if the loan was jointly taken, onus to repay would automatically lie with the co-borrower.
The deceased’s estate is considered to be insolvent if it is insufficient to cover outstanding debt. In this scenario, the creditors are liable to sue the estate in a bid to recover their money. However, the debt in this case typically dies, so the credit has no option but to write off such debts.
It is also possible that one dies without having created a will, which is known as ‘intestacy’ or dying intestate. In this case, the inheritance can be passed on only to a spouse or close relatives. Creditors would need to approach the courts to get debts cleared in such a situation.
In the case of a home loan, for example, if it is singly held, the housing finance company will request for the property to be (auctioned and) sold, the proceeds of which will go towards repaying the loan availed of. Of course, most home loans are taken jointly with a spouse, so the surviving spouse would need to repay the loan. If s/he is unable to do so for financial considerations, it is wise to meet the lender and explain the situation at length, following which either a change in the loan terms can be made to accommodate payments, or a settlement can be reached. This is entirely at the discretion of the lender, so it is best checked with the lender upon the demise of the borrower.
Another type of loan is the reverse mortgage, which is essentially nothing but a lien on the property. If there is no co-borrower, the loan is said to be outstanding upon the death of the borrower. In this case too, the property would be sold and the proceeds would be used to clear the outstanding loan.
In the case of auto loans, the scenario does not differ much. It is likely that the vehicle under loan will be repossessed, and the sale proceeds will go towards loan closure. Again, if jointly held, it is the responsibility of the surviving co-borrower to continue repaying the loan as per schedule.
The rising cost of education has led to a rise in education or student loans both globally as well as in India. Typically an education loan is given to a student only with a co-borrower (spouse or parent). Hence, the co-borrower needs to repay the loan. However, most student loans come with an insurance cover that takes care of this unfortunate eventuality for both the co-borrower as well as the lender. Not only is the loan repayment waived off for the co- borrower, but the insurance policy makes good the loss to the lender. Additionally, the co- borrower is also offered compensation, as the policy insured the life of the student borrower.
In case there is a surviving co-borrower on the loan who is unable to pay off the loan outstanding, it is likely that the CIBIL score of that individual will take a hit, owing to non- payment of dues. Hence it would be a wise move to immediately contact the bank or financial institution and intimate them regarding the death of the borrower. Once this is done, understanding the procedural requirements would be the norm to follow. Of course, to avoid a negative impact on their credit score, the co-borrower would need to ensure that the loan is paid off.
With death being an uncertain certainty, to ensure the peace of mind regarding finances of your loved ones in such an unfortunate event, it is wise to consider making a will. In addition, do keep an updated record of your finances, including loans as well as investments, banking details etc., so that in the event of your death, your next of kin know where to go. After all, while one can never predict death, you can take adequate measures to ensure that your bereaved family has one less struggle to cope with at such a trying time.