Estate Settlement of Personal Debts
Let’s do a simple test. Take a piece of A4 size paper and draw a vertical line in the middle of the page. On the left hand column, list down your assets, and take note of your emotion as you write them. On the right hand column, list down your debts (i.e. liabilities), and take note of your emotion as you write them.
Do you feel good as you write your debts? Especially if your debts list is longer than your assets? It is therefore human nature to avoid talking about debts because of the negative emotions attached to it. As a result, most people underestimate the level of their debt when they die. It is not uncommon to see an estate greatly diluted by outstanding estate debts.
Like it or not, the debts need to be settled. Even death does not wipe out debts. Settlement of debts has first priority over estate distribution. It is only when all estate debts have been settled, or in rare occasion been forgiven, that the residual estate can be distributed amongst beneficiaries.
Action taken by creditor
The creditors will usually lodge a caveat on the estate, until they are satisfied that there are sufficient funds in the estate and an undertaking from the estate legal representative to settle the debt before distribution is present. Before the caveat is removed, the letter of administration or grant of probate will not be issued. This will delay the estate settlement process.
Debts incurred with a hospital – Last Medical Expenses
The hospital from which the deceased was receiving medical treatment before will require an undertaking by the family members to settle the last medical expenses. Arrangements can be made with the hospital to use the deceased person’s CPF Medisave account to settle this. If the amount remains unsettled, the hospital will recover the debt from the guarantor, who usually is one of the deceased person’s family members. If this fails, the hospital will file a caveat on the deceased estate, or sue the estate (and the guarantor) to recover the outstanding debt.
Debts incurred with a bank – Private Home Loan
The bank will view the death of a debtor as default of loan. When a bank is informed that a borrower has died, it will write to the surviving borrower(s) to seek the death certificate, letter of administration (or grant of probate), and the latest income documents from the surviving borrower(s). This is to assess the credit-worthiness of the surviving borrower(s). If the income of the borrower is not enough to support the loan, additional borrowers need to be brought in. Otherwise, the bank will do a mortgagee sale on the property. If the mortgagee sale is not enough to cover the outstanding debt, the bank will recover the remaining debt from the estate. The bank has the right to net off the outstanding debt from the deceased person’s bank saving accounts.
Debts incurred with a bank – Outstanding Credit Card Debts
If the deceased is the principal card member, the bank will cancel the principal and the supplementary card, and recover the outstanding debt from the estate (the bank will normally file a caveat on the estate). The surviving supplementary card member will be liable for his/her own debts incurred in the supplementary card. The bank has the right to net off the outstanding debt from the deceased bank saving accounts.
If the deceased is the supplementary card member, the bank will cancel the supplementary card, and the principal card holder will be liable for all the transactions incurred by the supplementary card member.
Some credit cards are tied to an overdraft facility. The outstanding amount will also be recovered.
Debts incurred with a bank – Private Car Loan
The bank will close the car loan account and recover the car. The car will be sold in open market. If the amount is insufficient to cover the outstanding loan, the bank will recover the outstanding amount from the estate. The bank has the right to net off the outstanding debt from the deceased person’s bank savings accounts.
Debts incurred with a bank – Personal Guarantee on Business Loan
The bank will close the loan account and recover from the estate by filing a caveat. If there is more than one personal guarantor on the account, the bank will recover the loan from the rest of the surviving guarantors.
Debts incurred privately – Personal Loan
It is not uncommon for loans to be incurred privately. For example, a sole proprietor would borrow money from a relative or friend to keep a business going. The issue is that if there is no formal IOU, it is very difficult for the creditor to recover from the estate. The estate legal representative is under no legal obligation to recognise such loans, let alone settle it. However, if there is admissible evidence, like a bounced cheque issued by the debtor shortly before he dies, the creditor can file a caveat onto the estate.
Point to pay attention to:
If the estate has insufficient cash to settle the debts, the legal representative will have to forcedly sell the estate assets to raise the funds. If the forced sale amount is still not sufficient, the estate will be insolvent, and there will be NOTHING left to distribute to the beneficiaries, however beautifully the will was written.