Borrowings exceed assests – what is the situation if I die?

Question: I have substantial borrowings and I am concerned about what will happen if I die.  As matters stand the value of my assets would not exceed my liabilities?

Answer:  Up until recently this was a rare occurrence but I suspect it is likely to happen more frequently as the levels of increased debt hit home.

I am assuming that the liabilities are owed mainly to financial institutions and it is important to understand that where there is security for the debt, it is generally not affected by the death of the mortgagor.  For example, where the deceased has executed a mortgage in favour of a bank during his lifetime, then the bank is entitled to realise that security on death.  It is usual that a mortgage protection policy will have been taken out at the time of the mortgage and therefore one would expect in the majority of cases that there would be sufficient sums from the proceeds of the life policy to clear any mortgage.  However, if other monies have been borrowed on the strength of security then the bank may seek to sell the mortgaged property to recover the rest of their debt.

A direction by the deceased to leave mortgaged property to particular beneficiaries under his Will is ineffective – the mortgage takes precedence over any bequest.  If the proceeds of the sale of the property are not sufficient to discharge whatever is due then the remaining balance due becomes a debt of the Estate and the bank can seek to recover the amount due out of the other assets of the deceased.  If there are not sufficient assets to pay the debts then the Estate is technically insolvent.

Where a bank or other creditor is owed monies that are not secured, they must take legal action to enforce their claim within two years of the date of death.  In certain circumstances a creditor also has the right to take out a Grant of Administration if the Estate remains unadministered.

The information contained in this article is for general information purposes only and does not constitute legal or other professional advice.  Specific legal advice should be sought on any particular matter.

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