Handling Finances After A Parent's Passing: Dealing With Debt

There are quite a few procedures, discussions and decisions that need to be made after a parent's passing. Along with the assets a loved one leaves behind, the liabilities also become a critical aspect of importance.

A home loan is the most common liability one is confronted with in the wake of a parent's demise, but, in some cases, this may not be the only liability that comes with the estate.

Dealing with debt starts with evaluating the proportion of assets and liabilities of the deceased.

Start by understanding that the assets of the parent and their liabilities come as one bundle that the heir can either accept or refuse. This means the heir need not be saddled with the debts and liabilities, unless they have accepted the estate itself.

"If the heir does not accept the assets, they will also not be held against the paying off of liabilities. In any event, before approaching the bank or court for probate, the assets and liabilities of the deceased need to be listed and the heir has an option of either accepting or refusing the assets and liabilities," said Soniya Putta, partner at Solomon & Co.

One of the initial steps that an heir needs to take is to evaluate the debt and the assets, as this will decide the further procedures to follow.

At the time of filing for an application for probate or letters of administration or a succession certificate, the executor or the beneficiary filing these applications should be conscious about not listing any debt or liability, which may have become time-barred in law.

These are assets and liabilities which cannot be recovered by law due to limitation in schedule or list of debts and liabilities, Putta added.

In the scenario where the heir decides to accept the estate and liabilities, it does not mean that the debts will need to be settled with the heir's personal assets. When the estate is accepted, the heir is to use the assets of the deceased to settle the debts.

"The personal property of the deceased can be used to settle the liability. The personal assets of the heir cannot be taken by creditors. In case of a secured loan, only the collateral asset can be used to settle the asset," said Putta.

Other forms of liability like statutory liability will be recovered from the estate of the deceased as well. This includes the outstanding taxes of the deceased.

"Any tax liabilities, which had to be paid as per the government's demand, will be recovered from the estate or assets of the deceased," said Manmeet Kaur, partner at Karanjawala & Co.

There is one situation where the liability does fall on the heir. This is when a property or asset is jointly owned.

If the jointly owned property is mortgaged, the entire liability will be passed on to the surviving holder of the property. In this case, the full liability needs to be settled by the heir, even if they have to use their personal assets.

This case can be best taken forward if the heir can approach the creditors or the bank and discuss the way forward.

When it comes to movable assets or liabilities of the deceased, there may be cases of debt or unpaid shares. Again, in this case also, the heir is not expected to settle with their personal assets.

"If there is a case of liquidation of company shares held, the amount due can only be taken up from the assets of the parents. Also, in case of unpaid shares (shares where call money is unpaid) these shares would be forfeited and no demand can be made from the heirs," said Putta.

A similar case would be unsecured loans. In case there's an unsecured loan, only the estate of the deceased can be used by the creditors. The personal assets of the heir cannot be claimed for the same.

Settlement of liabilities from the estate can be taken up with the creditor concerned when the executor approaches them with the probate, letter or administration or succession certificate.

In a case where the value of the asset, like land, is higher than the liability itself, then it will be reverted to the heir.

"The standard procedure is that the attached property, if valued at more than the amount secured, then only the secured amount can be used to settle the debt and the balance amount is required to be returned to the person concerned," said Putta.

Similarly, there will also be cases where there are outstanding liabilities after the estate is used to settle the debt. Here, the creditors ensure that the best value for assets is taken, and the maximum possible amount is settled.

In case the heirs are unable to pay off the debts of the deceased, there may also be possibilities of post-demise negotiations, which can be explored with the bank to write off certain amounts or to agree on other settlements, according to Putta.