9+ tips debtors, heirs, creditors and guarantors need to know about what happens to debt after death
- What happens to debt in the event of death?
- Alternative: estate administration
- Peculiarity guarantee
- Risk life insurance not tied to the legacy
- Special feature: mortgage on real estate loans
Most borrowers exclude deaths when taking out a loan. Especially with long-term loans such as real estate loans, which are paid off over decades, the risk increases that the borrower dies early during the repayment phase. Most of these are not age-related deaths (e.g. accidents, serious illnesses).
The bank does raise this risk – especially in the case of large amounts of credit – and would like to hedge as much as possible, but there is no obligation to take out residual debt insurance that covers the installments in the event of death. In the case of pensioners, there is even a different age limit for the granting of loans from bank to bank. But if you want to protect your family so that they don’t have to move out of their own home if you die, you can take out preventive life insurance.
What happens to debt in the event of death?
In principle, debts – for example from loan liabilities – continue to exist after death. These, like any assets, are passed on to the legal heirs – or, if a will has been made, to the beneficiaries specified therein, taking into account statutory mandatory parts. If there are several heirs, a community of heirs is formed, which is then jointly and severally liable for any liabilities of the testator.
Since the financial situation is not always immediately clear, the legislature has therefore given the heirs a period of 6 weeks from becoming aware of the time within which they can refuse the inheritance. This must be done by means of a waiver at the competent probate court or, alternatively, through an intermediary notary.
If an heir rejects the inheritance, it automatically falls to the next heir. This can also turn down the inheritance within the period.
If the time limit has passed, the heir no longer has the option to withdraw from the inheritance. In the case of a negative asset, this is then owed to the creditor or creditors. In this case, the loan agreement continues and the contract partner is now the heir. He can now continue to use this loan or arrange a settlement with the lender (usually the bank) (eg special repayments taking into account any prepayment penalties). If the thing purchased by credit is still available (e.g. a car), this can be sold to reduce the debt. By the way, an overdraft facility is also a loan agreement that must be paid in the event of death.
Alternative: estate administration
Especially in the case of very unclear financial circumstances or a balance of assets and liabilities that is not generally recognizable, it is advisable to apply for estate administration. This takes over the power of disposal and the heir is no longer liable with his private assets, but at most with the value of the estate. Similar to an insolvency administrator, the estate administrator takes care of paying off existing debts from the available debt.
In the event that a guarantor has given a loan to the main borrower, who has since died, he will have to stand in for the proper repayment of the loan.
Risk life insurance is not linked to the legacy
If the deceased borrower has taken out life insurance and has also specified his heirs as beneficiaries, an interesting constellation arises: the heir can deduct the inheritance based on the debt, but still collect the sum insured. Legally, this is not considered an inheritance, but a gift.
In the case of a real estate loan, this would mean that the bank would now have to take care of the liquidation of the property secured by the mortgage.
Special feature: mortgage on real estate loans
By default, a declaration of personal liability is noted in the mortgage forms used in mortgage loans. If this was signed by both spouses, this means that the bank may enforce the entire property of the surviving spouse via the amount of the land charge in order to meet their claims. Even then and especially if he has turned down the legacy with the debt.
If no personal liability has been declared, the bank will use the deed of land charge to enforce and auction the property.
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