Estate Administration: Debt Repayment - Secured Debt

Part of the duties of a Personal Representative of an estate is to ensure that all debts owed by the deceased are paid before anything is distributed to the beneficiaries.  These debts will include any amounts owing at the date of death and debts that are incurred due to the deceased’s death such as funeral expenses and taxes.  There are two main categories of debt: secured debt and unsecured debt.  This article will focus on secured debt.

Secured debt is when a creditor offers to lend money to a person (debtor) with security in a particular property.  This property is commonly known as either “collateral” or “security”.  The idea is that the creditor has secured their claim for the amounts they lend and if the debtor fails to pay the creditor, the creditor can then take the collateral as payment for the debt.  Most common examples of these debts are a mortgage on a house or a car loan.  In those cases, the house/land is the collateral/security used to secure the funds loaned by the bank and the car is used as security for the funds loaned by the finance company.   Typically, upon the debtor’s death, the debt immediately becomes due and payable.

As a general rule, secured debt can only be realized as against the secured property.  For example, if a mortgage is in default, the bank can foreclose on the house.  The bank receives the property as payment in full of the debt; they cannot seek repayment from other assets.  This is true when it comes to estates as well.  Unless the Will states otherwise, an asset which has a debt secured to it is primarily liable for payment of that debt.  Using the above example, the house is the only asset available to pay that debt, the rest of the estate is not available to repay the mortgage. 

Debt can be insured.  Mortgage lenders will often offer life and disability insurance on their products.  This insurance will pay out the remaining balance of the debt if the debtor dies.  As with all insurance products there may be exceptions based on the circumstances.  We recommend that Personal Representatives of an estate always enquire to see if a debt was insured before paying the debt out.

If an estate contains an asset with a secured debt attached to it and it is not insured, there are several options available:

1.    The beneficiary of the asset may be able to pay off the debt and receive the asset;

2.    The beneficiary of the asset may be able to refinance the property and pay off the debt and receive the asset;

3.    The asset may be sold and the debt paid;

4.    The creditor may be forced to foreclose/repossess the asset in settlement of the debt;

5.    If the beneficiary receives additional property from the estate, they may choose to apply that property to pay the debt

Please contact us if you have any questions regarding an estate or you need assistance in obtaining probate.