What To Do When Someone Dies With Debts

Updated: 26 January 2024

How to handle the common issue of debts that have not been resolved before a person dies.

An Executor is the person who is appointed under a Will, to administer the estate of a person who has died (the Deceased). In the Probate process, the Court confirms that a specific piece of paper is the Last Will of the Deceased and appoints the person named in the Will to be the Executor.

The Executor must ensure that the Deceased’s testamentary intentions written in the Will are carried out. Some of the practical responsibilities are things like collecting and protecting the assets of the estate, obtaining contact information on all beneficiaries named in the Will, collecting and arranging for payment of debts of the estate, approving or disapproving creditor’s claims, and making sure forms are filed and tax payments are made.

The Executor is required to gather the assets of the estate and pay the Deceased’s debts, before assets are distributed to the beneficiaries of the estate. This includes forgotten debts like taxes and credit card debt. Administering a deceased estate is no easy matter. This can be made much easier by hiring a lawyer for the estate (which the Executor can select unless already specified in the Will).

Under South Australia law, if the assets aren’t enough to pay all of the claims against the estate, payment must be made in the following order:

Reasonable funeral expenses.
Estate administration expenses.
Debts and taxes.
Reasonable medical and hospital expenses of the Deceased’s last illness.
Judgments entered against the Deceased.
All other claims.

An estate planning lawyer knows the time limits for creditors making claims on the Deceased’s debts. These time limits vary from time to time and from place to place. Creditors are required to present claims to the Executor in writing in South Australia. If claims aren’t presented within the relevant time limits, the estate is not liable to the creditor. There are also timeframes for when the Executor may dispute a claim, and how much time the creditor has once they have received notice of the dispute to take legal action.

One of an Executor’s duties in administering a deceased estate is to satisfy any outstanding debts owed by the deceased person upon his or her death. An executor who is aware of an outstanding claim by a creditor, but nevertheless distributes the estate, may be personally liable to the creditor. Although there is no requirement in South Australia to advertise for creditors, it is generally advisable to do so in order to enjoy the protection afforded to Executors by s. Section 29 of the Trustees Act 1936 (SA).

The advertisement would give notice to all creditors, beneficiaries and other persons having claims against the estate to provide details of full particulars and proof of such claims within say 30 days or they will be excluded from the distribution of the estate. Although this is not compulsory, this course of action is recommended, as it provides the Executor with considerable protection against future claims.

Section 29 provides that upon the expiration of due notice to creditors, the estate trustee may proceed to distribute the estate assets, and will not be held personally liable should there be later notice of a claim following such distribution. The notice does not extinguish the debt, but removes the personal liability of the Executor.

The Trustee Act does not specify the manner in which notice should be made, nor the length of time that should pass before the notice expires.

One commonly accepted method is to advertise in the local newspaper in the location where the deceased lived, after which the Executor will generally wait at least 30 days before taking steps to distribute the estate.

Under the Administration and Probate Act of South Australia, if the deceased estate is believed to be unable to pay all of its bills (insolvent) – then the executor, or a creditor of the insolvent estate, may file a declaration with the Registrar of Probates in the Probate Division of the Supreme Court. This can be filed either before or after there has been a grant of probate or administration.

The declaration has to be served on the administrator or executor of the estate. Once it has been served the executor or administrator of the deceased estate must then administer the estate in the same manner as the estate of a person who has been declared bankrupt. Any person with an entitlement to the estate will then be treated as though they are a creditor of the estate. The executor or administrator will have to distribute the deceased’s assets to pay a part of, or all of, the debts in accordance with the same rules that apply under the Bankruptcy Act.

If, after the estate has been administered, the value of the estate is not sufficient to pay off all of the deceased estate’s debts, those unpaid debts will die with the person unless they were either held jointly with or guaranteed by someone else. In these instances, the debts will pass automatically to the surviving co-owner or guarantor for their payment. This is dealt with under the Bankruptcy Act 1966 (Cth) which is the Commonwealth law that deals with both living and deceased bankrupt estates.

Estate administration can get complicated quickly and hiring a professional can save time, stress, cost and risk-exposure both to the estate and the Executor. A lawyer specialising in Probate and the administration of deceased estates should be appointed to assist the Executor.

Contact Genders and Partners – the oldest law firm in SA (founded 1848) – to assist you to administer a deceased estate.