What happens to your debt when you die? As grim as it may sound, this is something that a loan borrower should give a serious thought. There are instances when a person suddenly passes away and leaves behind heaps of outstanding loans. The bereaved spouse, family members or heirs in turn get the surprise of their lives when the creditor comes knocking on the door to collect debt. This might not feel very humane, but is it legal for a lender to collect from the bereaved spouse or family members who are not parties of the loan?
How does the process work in Malaysia?
Well, this is quite a simple question but not many people know the exact process behind this. Basically, our possessions (i.e. assets) are collected as ‘estate’ when we die. An ‘executor’ would be responsible for administering the estate. The executor can be appointed by yourself through your will or by court in case you do not have one.
There are certain parties who would claim your estate before it can be distributed to your beneficiaries or next of kin. This includes:
- Funeral expenses
- Expenses and fees for executors
- Unpaid taxes
- Secured and unsecured creditors
Your creditors will have the legal rights to claim the outstanding debt from your estate. If your debt is secured with assets (i.e. property), then they will be able to take possession of the assets to recover the amount due. Any leftover amount in the estate after the claims would then be distributed to your next of kin according to your will, Distribution Act (if one does not have a will) or Sijil Faraid for Muslims.
To calculate the total asset value, it is (Total asset – Total Debt = Asset Value). The total asset includes assets that you have on hand such as property and savings. The debt amount would include loan commitments such as credit card, car loan, personal loan (including licensed moneylender loans), housing loan, and others.
So, does my family or next of kin need to pay for my debts if I die?
No, the creditors can only go after your assets or estate only. If the value of the estate is more than the debts, then all of the debt would be settled before the remaining of the estate is distributed to the beneficiaries. However, under the circumstances when the estate value is insufficient to settle all of the debt, the creditors will have to unfortunately absorb these losses as they have no legal rights to take action on your family members, unless your family members are acting as loan guarantors or co-borrowers for your debts.
Insurance as protection
To protect your loved ones, insurance coverage plays a central role when it comes to loans. Both the borrower and lender are assured whereby the unpaid debts are liquidated with minimal consequences and this would be less of a burden for the beneficiaries.
1. Secured Loans
Home/ mortgage loans
For secured loans like home loans, the loans are supported or covered by hard collaterals or personal assets. Mortgage loan borrowers are advised to secure mortgage life insurance prior to granting the loan. A borrower has the option to obtain a Mortgage Reducing Term Assurance (MRTA) or Mortgage Level Term Assurance (MLTA). These insurance plans provide the borrowers with protection in case of death and total permanent disability (TPD).
2. Unsecured Loans
Credit Card Debt
When it comes to credit card debts, users should consider the benefits of applying for credit card debt insurance. The monthly premium is just a small percentage of your outstanding credit card balance payable. Paying for credit card insurance is also a way to discourage the cardholder from overspending.
Even if personal loan providers do not require borrowers to offer personal assets as security for the loan, their primary objective is to ensure that the loans are paid. Hence, it is pretty common for many personal loans, including koperasi loans that are offered through the Direct Lending platform is an Islamic personal loan, to have insurance or Takaful in place so that in the case of major accidents or death, the insurance coverage will cover the remaining loan payments. The insurance or Takaful premium will be deducted from the loan principal itself.
Before you secure any personal loan insurance or credit card debt insurance, be sure to take note of the important clauses and exclusions although the coverage is centered on death benefits. There are also things to watch out for when apply for a koperasi loans, be sure to read the contract before signing any agreement. When applying for any sort of loan, especially during an emergency, there are fraudsters out there ready to take advantage of your vulnerability by using their sneaky scamming procedures.
In general, it is imperative for consumers to be aware of the loan procedures regardless of pre or post loan application. Consumers should educate themselves on the loan products available by understanding the different types of insurance coverage in Malaysia. Also, a responsible borrower would always think of the welfare of their loved ones and see to it that he or she leaves a clean slate behind.
Watch our video for more explanation:
This article is prepared by Direct Lending – a fast, simple and safe online personal loan platform for civil servants and private sector employees in Malaysia. Need extra financing? Check your eligibility with us today for free, with absolutely no upfront payment or processing fees. Receive funds fast as 2 working days!
(This article was originally published on the 26th of July 2019 and updated on the 18th of March 2021).